Radical reform of Scotland’s public services is needed if a £3 billion shortfall is to be avoided within the next three years, the country’s spending watchdog has said.

Auditor General Robert Black said there was an “urgent need” to improve the efficiency and productivity of public services in Scotland – a warning that is in line with The Herald’s Reshaping Scotland debate about the urgent need for streamlining of services.

He called for the public sector to have better information on spending and productivity, and for two Holyrood committees to organise wide-ranging performance reviews of major policy areas.

The watchdog warned ministers that efficiency savings alone would not be enough to fill the gap, and that the squeeze would force the whole public sector into “difficult” decisions.

Audit Scotland said the Scottish budget – although now £34.7bn compared to £17bn in 1999 – faced an unprecedented squeeze. By 2013-14 the budget could be between 7% and 13% lower in real terms, posing a “significant challenge” to the sector.

Mr Black’s report highlights spending pressures made worse by a smaller budget, an ageing population, the rising cost of free public services, extra pressures on public services through rising unemployment and a backlog of road and building maintenance.

One example given is property registration body Registers of Scotland. It had budgeted for a £4 million surplus last year but instead had an £11m operating deficit when the property slump hit its income from surveyors, solicitors and estate agents.

Using Scottish Government data and forecasts by the Centre for Public Policy for Regions, the report calculates that if spending continues at its current level until 2013-14, the budgetary gap will be £1.2bn.

The Government is already committed to 2% annual efficiency savings up to 2011, but this will not be enough to bridge the gap.

Mr Black said: “The Scottish Government’s efficiency programme is reporting significant savings, but the reductions required over the next few years will not be met just by the 2% efficiency savings, and difficult decisions will be needed on other ways to reduce public spending.”

The report insists that the public sector needs better information linking spending with actual service delivery, costs and performance, adding: “Most of the public sector needs to get much better at measuring and improving its productivity, but all too often we find that the basic information is not there.”

Finance Secretary John Swinney said: “I welcome Audit Scotland’s report, which confirms the scale of the financial challenges I expect Scotland will face in the medium term as a result of budget cuts from the Westminster Government.

“The new spending climate requires government at national and local level to look again at how to deliver the best quality public services, and we will continue to work with the whole of the public sector to ensure that resources are used in the best interests of the whole of Scotland.”

Labour’s Andy Kerr called on the Scottish Government to respond. He said: “It is time Alex Salmond and John Swinney realised we need to work together to get Scotland back to work. They need to concentrate on creating jobs and dump expensive vanity projects like the Scottish Futures Trust.”