A struggling health trust which runs two major Sussex hospitals has had its debts written off by the Government.

The Department of Health (DoH) has converted East Sussex Hospital Trust's forecast deficit of -£3.4 million into a surplus of £1.5 million.

DoH officials admitted the trust's debts had been created by the Government's "unfair" accounting system, which cut the funding of overspending trusts.

The trust, which manages the Conquest Hospital in St Leonards and Eastbourne District General, was due to end the financial year in debt because its failure to balance its books in the 12 months up to the end of March 2006 had landed it with a punitive £4.9 million budget cut.

But yesterdayMAR28, the Government said it would cancel the proposed charge - leaving the trust with a forecast surplus of £1.5 million by the end of the 2006/7 financial year.

David Townsley, Director of Finance at East Sussex Hospitals NHS Trust, said: "This is good news. The new system will be fairer and more transparent. In addition, it will remove one of the obstacles to us applying to become a Foundation Trust."

The DoH said its decision to reverse the effects of its punishing Resources and Accounting Budgeting system was an attempt to move to a more transparent financial regime, following criticism from the Audit Commission that the rules were unfair.

Under previous rules, overspending trusts not only had to pay back their debts but receive less income the following year - usually by an amount equivalent to the size of its overspend.

The DoH said the NHS as a whole was on track to deliver a surplus of £13million by the end of the year - compared with a deficit of £547 million last year.

The axing of the "RAB" deductions will see £178 million returned to local NHS trusts across the country.

David Nicholson, chief executive of the NHS, said: "The majority of NHS trusts have improved their financial performance over the last year, meaning we are now in a position to complete modernisation of the NHS financial regime.

"We are moving NHS trusts out of the resource accounting and budgeting regime as this was inconsistent and unfair.

"We are now in a strong position to further transform the care we give our patients, reducing waiting times as we move toward a maximum 18 weeks from referral to treatment and delivering more care closer to home."

Mr Nicholson said NHS trusts would still be expected to manage their spending, recover any deficits and repay loans for themselves.

Shadow Health Secretary Andrew Lansley, said: "Last year I urged the Government to drop RAB, the brainchild of Gordon Brown, so I welcome their decision to finally do so.

"Had Health Secretary Patricia Hewitt taken my advice at the outset then NHS staff could have been spared the stress of using an accounting system which added to the worry of dealing with huge deficits, and allowed them more time to focus on patients."