A return to the bad old days when hospitals, schools and government departments wasted money to stop the Treasury clawing it back is on the cards, MPs warned on Monday.

A cash-strapped Treasury is limiting the ability of departments to carry forward unspent capital and revenue from one year to the next, the Commons' public accounts committee said. Current arrangements "may no longer incentivise departments to manage their budgets in a way that represents optimum value for money", according to the public standards watchdog.

One of Gordon Brown's innovations as chancellor in 1999 was to allow departments to carry forward unspent cash to allow them to spend wisely. This ended a regime in which hospitals painted yellow lines on their car parks and schools bought equipment they did not really need at the financial year end to stop the Treasury clawing cash back.

However, the Treasury is exercising "greater control over the amounts departments can use from unspent balances", the PAC said.

"Some departments consider that an unintended consequence of this is there are now insufficient incentives to avoid wasteful spending of excess funds towards the end of the financial year."

The sums at stake are large. At the start of the last financial year, departments had underspent cumulatively by £12bn ($21bn) on revenue - more than the budget of either the Home Office or the Justice department, which runs prisons - and by more than £10bn on capital.

Almost 25 per cent of planned capital was not spent in 2006-07, and Treasury scepticism about the level of underspend is becoming more evident.

In evidence to the committee, Nick Macpherson, the permanent secretary at the Treasury, acknowledged that there is "a real tension" in handling underspends. "You want the money to be spent efficiently," he said, "so you do not want departments to be forced to spend it."

But "there comes a point where if it [the underspend] is high, you have to wonder whether the budgeting has been sensible or not".

One of the biggest underspends is in the National Health Service, which officially recorded a £1.65bn "surplus" last year, although managers say the real figure is appreciably higher. Alan Johnson, the health secretary and David Nicholson, the NHS chief executive, say the planned surplus has been agreed with Treasury and is safe from clawback - even though in 2007-08 the Treasury did quietly take back £2bn of NHS capital.

The committee noted that underspends "can be consistent with good financial management" but consistent underspends can suggest that too much contingency is being built in.