Public sector technology budgets will be cut extensively until 2013, with large IT schemes quickly falling out of favour, according to a new report.

The cuts mark the first time expenditure has fallen since the dotcom bust, analyst house TechMarketView wrote in its report. This year would be the hardest hit, with much of it marked by “inaction” as decisions are put on hold ahead of an election. The government is attempting to cut £3.2 billion from IT costs.

Between 2009 and 2013, central government IT spending will fall 0.8 per cent, police IT expenditure 0.9 per cent, and defence 0.2 per cent, the report predicted.

If the grim predictions of cuts come true, they will cause serious harm to the UK software and services industry, which has come to count on Whitehall, the police and the military for 28 per cent of its revenues. As large schemes are cut or curtailed, project services will fall from representing 30 per cent of IT spending to 14 per cent by 2013, TechMarketView said.

Large IT projects would be broken into smaller chunks, it predicted, or let locally to a range of suppliers within framework contracts. If the Conservative party wins the general election, IT spending would fall particularly sharply, as the party has promised to scrap the ID cards programme and centralised NHS patient records, and reduce IT spending.

Whatever happens at the ballot boxes, consulting, systems integration and software would be hit the hardest, TechMarketView said.

But the report stated some sectors would see budget growth, including health and education, as at least some investments on major projects continue and new areas see expenditure. Health sector IT budgets would grow 3.8 per cent for the period, and education 3.2 per cent, it stated. Local government budgets would grow 3.1 per cent, driven by an uptake in outsourcing.

Tola Sargeant, research director at TechMarketView, said that while the cuts were alarming, the news was “not all doom and gloom”, particularly for any businesses providing services that are in growing demand - including outsourcing, data security, fast cost cutting transformations and sustainability schemes. Shared services, especially those for finance, human resources and payroll, would also provide growth.

But there were serious risks associated with changing the scope of projects, Sargeant warned. On the £12.7 billion NHS National Programme for IT, which is being reduced in size, changes needed to be managed “sensibly”, she said. If they are not, then it would be “patients and tax payers that suffer most” as system benefits are not delivered and the government is left struggling to renegotiate contracts.