Heath ministers who fail to spend extra Budget booty could lose NHS cash to other departments, a senior Treasury official has warned.

Health service budgets are now set to rise by 7.4 per cent over inflation for each of the next five years, lifting spending to £72.1 billion in 2002/03 and then up to £105.6 billion in 2007/08.

The rapid rise in spending has raised concerns about the ability of NHS managers to spend the money effectively and efficiently.

In his Treasury-sponsored report on NHS finance, Derek Wanless called for NHS funding to rise to between £96 and £97 billion by 2007/08, around £8 billion less than the sums actually committed to the health budget by the chancellor.

Wanless warned that even the lower sums he was recommending were at the higher end of what NHS managers and staff could reasonably spend effectively. Increasing funds too quickly could hit capacity constraints, he cautioned.

And official figures revealing a £500 million underspend in the Department of Health's 2001 budget, prompted a senior Treasury official to tell MPs that significant structural underspends could be reallocated to other departments.

Giving evidence to the Commons Treasury select committee on Tuesday, Nicholas Macpherson, the powerful department's managing director responsible for public services, said it was "conceivable" that surpluses could be reallocated.

Asked what action the Treasury could take to deal with persistent underspenders , Macpherson confirmed "there are big sanctions which the Treasury can use". "We are just entering a spending round," he said.

But following changes to Treasury rules allowing underspends to be carried over into the next financial year, Macpherson assured MPs that he was "reasonably relaxed" about the issue.

He predicted a "steady state" would soon be reached where underspends are compensated for by overspends.

"We're working very closely with departments to make sure they have the right systems in place to manage spending, to forecast spending," he said.

All departments have been asked to produce investment strategies and the Treasury was also working with the Office of Government Commerce to ensure capital projects are well managed.