Under proposals being worked out by Sir Peter Gershon, the head of the government's efficiency review, the savings would be met by cutting up to 80,000 civil service jobs as well as other administrative jobs in local government and health.
The reforms would lead to the death of the "generalist" civil servant in favour of higher-paid, higher-skilled specialists working across departments.
They would also transform the regulation, inspection and funding of the private and public sectors, and slash red tape by ensuring local authorities joined forces to "purchase" services. The number of "purchasers", who contract out for everything from street cleaning to care home places, could then fall from 400 to as few as four.
Sir Peter, jointly commissioned by the Treasury and Downing Street, submitted the 195-page draft of his review to the prime minister and chancellor in December although the final report will not be submitted until April. That assessment will then feed into the July spending review, which will set departmental budgets up to 2007.
If the review is politically timely, coming into force before next year's anticipated general election, its leak yesterday to the Financial Times was more so. "This was clearly designed to pre-empt the Tories' launch and did so rather effectively," Vince Cable, the Liberal Democrat Treasury spokesman, said. "But I think it may have done the government some harm because it raises the obvious question: if there were all these efficiency gains waiting to be made, why haven't they done so?"
Mr Letwin claimed to be delighted by the report's findings, stressing it showed "there is a great deal of common ground between us if we only admit it".
But the Gershon review goes far further than the Tory plans, announced last week, to freeze Whitehall recruitment. "There's a world of difference between a serious review like the Gershon review and the kind of arbitrary freeze in civil service numbers and the immediate real-terms cuts in departmental budgets that Oliver is proposing," the Cabinet Office minister Douglas Alexander said.
Under Sir Peter's recommendations, the government should create a series of "world class" buying agencies to improve the £120bn a year it spends on procurement, for everything from defence, transport, construction and social care.
The proposals would see some of the 80,000 civil servants being redeployed as either "high-level" classroom assistants; or "case managers" who would carry out paperwork for police officers to boost their efficiency.
Unison, Britain's biggest trade union, said it was "bizarre" to suggest people could be "parachuted into highly skilled jobs in teaching and healthcare". But Jonathan Baume, general secretary of the First Division Association, said: "The unions should embrace the principles of these reforms which can help to ensure we have world class public services for years to come."
