The Department of Health is expecting its budget to increase by as little as 1.9% next financial year, acting permanent secretary Richard Douglas has confirmed.

Giving evidence to the House of Commons health committee this morning Mr Douglas said the department’s negotiations with the Treasury around the government’s commitment to increase NHS funding in “real terms” focused on GDP growth as its measure of inflation.

Figures published alongside the June Budget predicted GDP inflation would stand at 1.9 per cent in 2011-12 and 2.3 per cent in 2012-13.

The latest Office for National Statistics show inflation in September stood at 3.1 per cent when measured by the consumer price index and 4.6 per cent when measured by the retail price index.

However Mr Douglas – who is also DH director general for finance and chief operating officer – said an increase in line with GDP inflation would still feel like a real terms increase for the NHS due to the previously announced two year pay freeze from April 2011.

He said NHS inflation in the past had been “driven largely” by pay inflation. Freezing pay would therefore significantly reduce the cost inflation to the service.

 Although news the Treasury is using the lowest possible measure of inflation when discussing meeting the government’s pledge will come as a blow to some, there was slightly better news on the question of what baseline the increases will be apply to.

There had been concern the Treasury would apply the promised increase to actual NHS spending in the last year rather than its budget, which would mean the £1.5bn under spend this financial year would effectively be lost.

However, in response to questions from the committee chair Stephen Dorrell Mr Douglas said: “The measure will look at the provision not the spend”. He confirmed also by “provision” he meant the budget set for the NHS this financial year.

Mr Douglas said that increase would be awarded irrespective of the £2.5bn to £3bn in cash surpluses currently held by foundation trusts. But – in a reference to the fact foundation trust spending scores against the NHS’s overall spending limit – he admitted, “there will always be discussions around the extent surpluses can be spent around the system”.