In a special review, the commission concluded that hospital trusts should remove the current ‘resource’ accounting method, because of its ‘double whammy effect’. Under resource accounting, initial deficits prompt a cut in spending to achieve a balanced budget. A deficit of £10m, for example, is carried forward into the next accounting period and therefore requires the trust to cut spending by £20m to reach an even keel.

‘Adjustments can clearly make the task of recovery more difficult and are inconsistent with the trust financial regime,’ stated the review.

A ‘banking facility’ should also be set up to enable the trusts to borrow capital, and a small percentage of NHS budgets should be pooled to provide a safety net.

The review criticised the NHS financial reporting regime for not being aligned with UK GAAP. ‘There appears to be a view that there is an “NHS method of accounting”, which can be adjusted to fit departmental objectives, rather than a robust approach to the implementation of UK GAAP.’

Mark Knight, chief executive of the Healthcare Financial Management Association said the changes could make the NHS more financially stable. Tory shadow health minister Stephen O’Brien said: ‘We hope the health secretary learns the lessons of this report, but the question remains: why has she waited for a gross deficit of £1.3bn before addressing the cash crisis in our NHS?’