Government needs to accelerate the pace of change in the way it works to ensure spending cuts over the coming years lead to lasting reductions in the cost of public services, Whitehall's value-for-money watchdog has said.

The National Audit Office (NAO) warned tactics such as freezing staff pay and taking the axe to consultants' contracts will deliver only short-term savings, and argued that the Government must "go further" by redesigning public services so that they operate permanently at lower cost.

With departmental spending due to reduce from £428.8 billion in 2009/10 to £335.3 billion in 2017/18, at today's prices, the scale of challenge facing financial managers within government is "stark", said the NAO in a report. Local councils and NHS trusts which have previously been able to absorb cuts in funding from central government will face "increasing difficulties" in doing so in the years to come, as austerity lasts longer than originally planned.

While applauding "signs of improvement" to financial management practices in Whitehall over the past few years, the NAO said that the Government "remains a long way from ensuring that decision-making is routinely based on appropriate and robust information". "Departments often do not integrate financial management with their strategic and operational planning," said the watchdog. "An absence of planning prevents departments from achieving the best results by linking resources and outcomes."
Unit cost data is not systematically collected across Government, and even when a special effort was made to gather it for the 2010 spending review, the data provided was "limited and inconsistent".

Although more top Whitehall mandarins are now drawn from the finance profession, the senior civil service still lacks "some of the skills associated with effective financial management, such as commercial skills", said the report entitled Financial Management In Government. Progress made in recent years "does not mean that Government is well placed to meet the forthcoming challenge of continued fiscal consolidation alongside substantial demand pressures".

The NAO recommended that the Treasury ensure more effective leadership to incentivise finance professionals to confront the challenges they face. The Government's Finance Leadership Group should take responsibility for identifying challenges and addressing them quickly.

Auditor general Amyas Morse, head of the NAO, said: "Finance teams in departments and other public bodies have a vital role to play if the Government is to deliver the planned public service reform. Finance managers are now being taken more seriously and playing a more central role in the efforts to provide sustainable services at lower cost.

"However, the pace of change must be accelerated. Savings are being made but progress in restructuring how services are being delivered is lagging. If the challenge of reforming the delivery of public services is to be met, then the Treasury and Finance Leadership Group need to provide more effective impetus to strengthen financial management capability across government."

A Treasury spokesman said: "The Government's economic strategy to protect the economy and restore the public finances to a sustainable path has already reduced the deficit by a third. High-quality financial management in Government is key to meeting spending plans and delivering public services as efficiently and effectively as possible. The NAO notes the positive impact of Government action to increase accountability and build skills, and the Government will review what further improvements could be made as we conclude this spending round."