The scale of the financial mismanagement that resulted in the axing of 1,400 jobs at Defra and the downgrading of numerous green business support services has today been highlighted after a National Audit Office report found the department twice set budgets including money it did not have to spend.

The report revealed that over the past two years Defra approved an annual budget of £3.8bn that was £230m greater than the money allocated by the Treasury.

Defra's management board made the decision in an attempt to tackle the historic underspend at the department. It predicted it would be able to balance the books by the end of each financial year, but instead a series of animal health crises and unexpected costs associated with the IT system for handling farm subsidies meant that in 2006-07 Defra "was the only department to overspend against its capital departmental limit".

The report criticised the overspend and in one section concluded that there was "insufficient evidence of a methodical and structured approach to scrutinising plans and budgets".

A spokeswoman for Defra said "lessons had been learned" and that the department had set a balanced budget for the coming year that includes a contingency fund for addressing unforeseen spending.

"The budget for 2008/09 has not been reduced by any claw-back of over-allocations in previous years," she added. "Defra's 1.4 per cent increase for 2008-2011 shows the government's commitment to the environment and within that allocation, Defra has set a balanced budget for the coming year, incorporating all our priority and essential spending, while providing flexibility for any future emergencies."

Tim Burr, head of the National Audit Office, said he welcomed the improvement in Defra's financial management bu t warned that "there is still some way to go before we can feel confident that public money is being spent effectively and efficiently". "The Department needs to maintain these first steps if it is to cope in the tough financial environment reflected in the 2007 Comprehensive Spending Review," he added.

However, the need to set a balanced budget from April has resulted in a round of cuts that has necessitated 1,400 job losses across the department. A raft of green business services such as WRAP and Envirowise have also been affected, along with agencies working on canals, conservation and animal health research as the department has sought to cut annual spending by £300m for the next three years.

Business groups have responded angrily to the cuts, accusing the government of undermining investment in environmental initiatives at a time when it is urging businesses to bolster their green investments.