Foundation trusts should be freed from one of the shackles put in place during the Labour government’s internal battle over their creation, Monitor’s new chair has said.

Steve Bundred has told HSJ foundation trusts’ assets and liabilities should now be taken off the public sector balance sheet.

In 2002, then Chancellor Gordon Brown, the leading Cabinet critic of separating hospitals from state control, was perceived to have won a victory when Tony Blair ruled foundations would be kept on the government’s books.

Mr Bundred said changing this would give foundations more freedom because the Treasury and Department of Health - no longer counting FTs in their spending - would have no reason to tell them what to do. Moving FTs off the Treasury books might encourage banks to increase lending to foundations. But it would also prompt fears that services could be shut or buildings sold off to pay debts. Mr Bundred said measures could be put in place to prevent such sell-offs.

He said a model for the process of removing FTs from the public finances was the 1992 Further and Higher Education Act, which took polytechnics from local authority control and placed them off the balance sheet.

“There are precedents and models, if the government wants to give FTs more autonomy, and I think it will.”

Imperial College professor of health policy Nick Bosanquet, a consultant director for the think tank Reform, said the change would be “a very significant sign”.

He said the move would almost certainly mean the government would no longer commit to prop up foundations, and pay their debts, if they go bust. Instead, an insolvency regime would be put in place that could see banks take their share of a failed foundation’s assets.

He added: “It would give foundation trusts freedom and responsibility, and make it much more possible for them to invest in new services.”

Foundation Trust Network director Sue Slipman said “everyone would welcome” the proposal but many details had to be filled in about how it would work.