The NHS in Scotland spent less than its total budget last year but watchdogs are warning of tough times ahead.

Both the government's own annual report, published last week, and Audit Scotland's independent financial overview, which comes out today - reveal a small underspend of£26m on a budget of£10.1bn.

NHS Scotland chief executive Kevin Woods said he was optimistic it would weather the storms in this financial year, despite tighter budgets and factors such as rising fuel costs. He said: "This year the financial position is very good [and] I am confident we will achieve break-even, as we did last year."

Auditor general for Scotland Robert Black said financial performance was improving, with only one of Scotland's 14 NHS boards, Western Isles, in deficit.

But he said: "NHS bodies should now prepare for some considerable challenges ahead. Funding increases will be getting smaller at the same time as bodies are asked to generate significant savings. In addition to the continuing pressures such as pay deals and drug costs, bodies will also have to deal with new issues, such as the need to cover staff whose hours are restricted by European employment laws."

On target

Dr Woods said the annual report of the NHS - the first since 1999 - had been published in response to a request from Audit Scotland that the government should improve its performance reporting.

Although it showed the service was on track to meet most targets, he conceded that it was falling down on three areas: cancer waiting times, staff sickness absence and ambulance response times.

He said the NHS was "tantalisingly close" to meeting the aim of no more than a 62-day wait for cancer treatment, achieving 94.1 per cent against a target of 95 per cent. Work continued on other issues, including healthcare associated infection rates.

Dr Woods said efficiency savings would be reinvested in patient care. Boards were relying less on non-recurring funding for day to day running costs, a move also praised by Audit Scotland.