Osborne will struggle to cut another £77bn, warn MPs

Serious doubts over George Osborne's ability to slash £77bn from government spending are raised by an influential group of MPs today.

They warn that Whitehall has yet to identify where all the money can be found – and say they are worried the Chancellor still does not have a firm enough grip on driving through the austerity programme.

Eighteen months ago, Mr Osborne announced a four-year spending squeeze, with some departments suffering cuts to their budgets of 25 per cent by 2014-2015.

Amid grim economic figures, he has since warned that the country faces a further two years of cuts lasting well beyond the next general election.

In a report today, the Public Accounts Committee (PAC) said it was worried about the lack of progress in preparing for future cuts, which will see frontline services reduced and thousands of civil servants made redundant.

It said departments coped well with the first year of the measures, achieving a £7.9bn saving through 44,000 job losses and reductions to back-office costs and spending on capital projects. But the PAC warned Whitehall faced a "more significant challenge" in cutting spending by a further 19 per cent. And the MPs warned the extension of the austerity measures beyond the election meant departments would need a "radical approach" to finding savings.

It said major reforms in health, education and justice would help to save cash, citing the example of planned changes in legal aid and sentencing policy which is intended to save £1bn a year for the Ministry of Justice headed by Kenneth Clarke. However, the MPs added that the Treasury and the Cabinet Office had to adopt a more hands-on role to ensure cuts were delivered with as little pain as possible.

"An informed lead should be given by the centre if arbitrary cuts are to be avoided," they said. "A long-term forward strategy is needed and departments must look increasingly to wider reforms to deliver more fundamental and systemic change in how government delivers services."

The former minister Margaret Hodge, the PAC's chair, said: "Departments need to do better at planning their finances logically, understanding the relationship between costs and outcomes better and not going for the easy option which could most damage frontline services."

She warned of a danger of cuts in one department leading to extra spending elsewhere in Whitehall.

"The Treasury needs to get a grip at the centre on the approach taken by departments, otherwise government will impose arbitrary cuts and fail to secure value for money," she added.

Ms Hodge also saidfinancial officers in Whitehall departments should be "held accountable for delivering more with less" – and should be rewarded for success and penalised for failure.

A Treasury spokesman said: "We welcome the PAC's recognition of the success of departments in delivering budget reductions so far.

"The Treasury has a very clear and systematic approach to controlling public spending. It also constantly seeks to improve this, which is why earlier this week the Chief Secretary set out new, tighter rules to improve financial management in Whitehall and help departments live within existing budgets."