The recent quarterly financial report from the Department of Health provides some encouraging signs as the NHS gets to grips with previous years' overspends. But the detail looks patchy.

The recent quarterly financial report from the Department of Health provides some encouraging signs as the NHS gets to grips with previous years' overspends. But the detail looks patchy.

The net end-of-this-year position forecast three months into 2006-07 suggests a small surplus of£18m across England. This is a result of a£186m increase in the forecast surplus and a reduction in the gross deficit from£1.2bn to£883m. But this obscures the fact that£350m - topsliced at the beginning of the year to provide a contingency reserve - is included in the figures.

Looking at individual NHS organisations also reveals how patchy the recovery seems to be. Across London's 69 trusts, for example, while 40 per cent show some improvement over last year (either increasing their surplus or reducing their deficit), 43 per cent are now forecasting reduced or no surpluses and 16 per cent a worsening of their financial position, moving from surplus to deficit or increasing their deficit.

For the 23 London organisations reporting a deficit last year, while 70 per cent now forecast an improvement, the remainder are forecasting a worsening position. For one - Queen Elizabeth Hospital trust - the 2006-07 forecast deficit represents nearly a third of its predicted turnover. Queen Elizabeth and the other six organisations with worsening deficits in London are going to have to improve considerably if the NHS is to meet one of the DoH's three goals of seeing an improvement in the financial performance of those reporting a deficit last year.

At the pace of recovery suggested by the quarterly report, it could take at least another two years to eradicate the gross deficit across the NHS.

Of course, all this is based on forecasts just three months into the year. As the fourth chart shows, last year's three-month forecast for the end of 2005-06 looked very different from the unaudited outturn. For example, at the end of the first quarter 61 primary care trusts were forecasting a year-end deficit. The actual number turned out to be 106. And the tendency was for the majority of PCTs and trusts (around three quarters) to forecast break-even positions.

This year is very different. There is much more pressure to tackle the deficit from last year, through managed upfront brokerage via the£350m topslice and by attacking the root causes of overspending. Nevertheless, as DoH finance director Richard Douglas admits, there is no room for complacency.

John Appleby is chief economist at the King's Fund.