Blairs NHS faces 7bn deficit by 2010

The NHS faces a deficit of nearly £7 billion by 2010 unless a "productivity miracle" is achieved.

Think-tank Reform warned that cost pressures such as extra staffing, large building programmes and more expensive drugs would produce a funding gap.

Researchers said that an extra £18.2 billion of funding would be needed, but only £11.4 billion was available - a shortfall of £6.8 billion.

Report author Professor Nick Bosanquet, of Imperial College London, concluded: "The NHS has two options; either radical reform to improve productivity or local rationing, rising waiting lists and failing staff morale."

Among the reforms recommended were greater private sector involvement in health care and better financial management.

Hospitals should also be given greater autonomy so patients could have more choice.

The think-tank said building projects for the NHS which used private money were costing far more than planned and should be stopped if they were in the early stages.

It also called for a review of medical training with the number of trainees increasing much faster than the rate of retiring doctors. Medical unemployment was "all but inevitable in a very tight financial environment".

Last year Prof Bosanquet and Reform published a study which warned the NHS would barely be able to cover its costs by the end of the decade.

His new report, The NHS in 2010 - reform or bust, co-authored with Henry de Zoete and Emily Beuhler, of Reform, claimed the situation had worsened.

The report said the costs of existing programmes had increased and new costly programmes have been launched despite Chancellor Gordon Brown's announcement that NHS spending increases will slow after 2008.

The predicted £6.8 billion funding gap was a "minimum estimate", the researchers added.

"The Department of Health is digging a deeper hole by announcing numerous policy initiatives."