Funding of £500 million for hospital building and refurbishment is being withheld by the Government in the first sign of the severe cuts likely to be forced on the NHS in the recession.

A letter between health chiefs, seen by The Times, suggests that “the Treasury is unlikely to agree further releases of funding” for the building of a new generation of community hospitals, announced to much fanfare three years ago.

The problems facing the project have emerged as Andy Burnham prepares for his first speech as Health Secretary today at the NHS Confederation annual conference. Mr Burnham, a cheerleader for community hospitals as a junior minister, admitted yesterday that the NHS would face a challenge over the next five to ten years. But he sought to allay fears of closures or job cuts after a confederation report warned of a multibillion-pound budget shortfall over the next decade.

There were angry words in the Commons over public spending after the next election. Gordon Brown accused the Tories of planning deep cuts in public services after Andrew Lansley, the Shadow Health Secretary, said that most departments would have to cut budgets by 10 per cent in the three years after 2011 to give real-terms increases to the NHS, schools and foreign aid. David Cameron said the Government’s own plans would result in a 7 per cent cut for some departments.

While Mr Burnham played down fears of a funding crisis, a letter from a strategic health authority revealed that plans were already under way to curb spending.

A total of £750 million was allocated in 2007 for the five-year community hospitals programme, hailed as the centrepiece of the drive to bring NHS services to local communities. The units take on cases that do not require the fully equipped intensive care wards found in larger hospitals. Work carried out includes elective day cases, X-rays and post-operative rehabilitation for procedures such as hip replacements. Only £250 million of funds has been spent to date.

The letter about funding for Ludlow Hospital — sent by Peter Spilsbury, of NHS West Midlands, to Jo Chambers, head of Shropshire County Primary Care Trust — says “the Department of Health is advising SHAs to take forward schemes through alternative funding routes to the community hospitals programme”. It states that Andy Stubbing, a senior official at the Department of Health, has said that “the Treasury is unlikely to agree further releases of funding for this programme”. It concludes that trusts will have to find funding through other means, such as Private Finance Initiatives or “some form of joint venture with another funding body”.

Stephen O’Brien, the Tory health spokesman, said that the letter, which was obtained by Philip Dunne, the MP for Ludlow, betrayed the real state of the Government’s NHS failings. “Labour constantly talk about increasing spending on hospitals to boost the economy but the cancellation of this programme betrays the mess Gordon Brown has made of the public finances.”

A Department of Health spokesman said there were no plans to withhold funding from the programme, which was assessed case by case. It was unclear why the department had advised otherwise in the letter, he added.

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