01/02/2012 21:31 GMT | Updated 02/02/2012 02:20 GMT

Government Needs To Make 'Fundamental Changes' To Meet Spending Challenge, Says NAO

Government departments need to make "fundamental changes" to successfully cut spending by 2015, spending watchdog the National Audit Office (NAO) has warned.

While the NAO said the government cut 2.3% from its budget last year, it pointed out spending still needed to fall by 19% in real terms by the end of this parliament, under plans set out in the government's comprehensive spending review, adding there was "much more" to do.

They also said some departments would have trouble achieving this and required real change, cautioning against "short term measures" like cutting back room staff.

"Not understanding the factors driving cost and the consequences of spending cuts makes it difficult for departments to forecast future spending," the report said.

The budget watchdog also warned that no department had sufficient contingency plans if outside events put them off-track.

"The plans examined by the NAO do not have sufficient contingency to cover either the risk that savings are not realised or the impact of external uncertainties, leaving departments to depend on finding greater savings in future years to fill any gaps."

The Institute for Government's Director of Research, Julian McCrae said: "The underlying weaknesses in areas like financial management identified by the NAO are not new, but the scale of the challenge facing the civil service means there has to be much greater urgency in resolving them. It’s therefore crucial that the Government takes the NAO’s report seriously as a call to further action.”

Margaret Hodge, chairperson of the public accounts committee said departments needed to change "the way they operate" to meet the challenge and could not just cut front line staff.

"Departments will need to develop a clear vision of how they will work with less money. Failure to achieve this will risk front line services and long-term value for money."

NAO head Amyas Morse warned departments will need to cut spending "much more" in the next four years. “Departments will achieve long-term value for money only if they identify and implement new ways of delivering their objectives, with a permanently lower cost base.”

A Government spokesperson said they were "on track" to deliver cuts: "Departments have already delivered over £6 billion of savings last year and are on course to live within their budgets again this year.

"The government has taken tough decisions, including further pay restraint and reforms to public service pensions, which will deliver significant savings over years to come.

"We promised to leave no stone unturned in the hunt for savings at the heart of government and we have delivered on that promise with over £3.7 billion of efficiencies in just one year."

Since the financial crisis began, a £114bn hole has opened up in the public finances, according to economic think tank the IFS. By the end of this financial year, only 6% of the total proposed cuts will have been implemented, and given the current performance of the economy, the rest may have to be rethought.