The NHS is facing a funding shortfall in Wales

The NHS is facing a funding shortfall of 5% thanks to more expensive drugs, the cost of looking after elderly patients and the drive to cut waiting times, AMs were warned.

NHS finance directors told a cross-party inquiry that a funding increase of 2.6% from the Assembly Government next year would not keep up with inflation, which they expected to be 2.7%.

Paul Davies, of Cardiff and Vale University Health Board, said a spending squeeze was affecting public services at the same time as pressures were mounting on the NHS's resources.

He told the Assembly's Finance Committee the health service faced a growing bill for the care of frail and elderly patients, the cost of newly-approved medicines and a 26-week waiting time target to be met by December.

Assuming inflation was paid for, other costs worth 5% of the NHS budget would have to be absorbed, he said.

"What's so important is that at this point in time we are facing unprecedented challenges both in terms of the resources available and the demands on it," Mr Davies said.

He said his own organisation had a budget deficit of £10 million, which meant it would have to prioritise investments and make "difficult choices" about staff.

There was about £1 billion the NHS could spend "that much better", although he stressed the money was not being wasted.

Mr Davies added that increased funding next year, taking the Assembly Government's health budget to nearly £5.8 billion, was "slightly more" than anticipated.

A major reorganisation of the NHS saw trusts and Wales's 22 local health boards replaced with seven unified boards this month - a move intended to kill off what remains of the internal market within the NHS.