A review commissioned to look for greater efficiency in government has suggested £15bn could be saved each year, according to a leaked report.
Could job centre become one-stop shops for government services?
Sir Peter Gershon, head of the office of government commerce (OGC), has come up with proposals that could see the number of civil servants cut by 80,000.
The news came as the Tories unveiled their plans to save up to £35bn by cutting waste and lower spending rises.
The debate now looks set to focus on whether savings should be reinvested.
Sir Peter is reported to have proposed that any savings could be re-invested into frontline services such as health and education.
But possible savings may also have boosted Tory hopes that they will be able to offer voters a tax cut ahead of the general election - widely expected to be next year.
The report is not finally due out until 26 April but according to a leaked version published by the Financial Times, it will identify a number of areas where savings can be made.
These include areas such as the amount the public sector currently spends per employee on human resources - understood to be two or three times the level in the private sector.
It also calls for compulsory online transactions for people who are "e-capable" for everything from tax returns through to benefits claims.
On Monday Mr Letwin said Sir Peter's report showed there was "a great deal of common ground" between government and opposition over the issue of streamlining the civil service.
That followed a keynote speech by the shadow chancellor in which he said he could make £35bn of savings a year by 2011 but simultaneously match Labour spending on hospitals and schools.
"We both agree the state has to grow. We both agree it has got to grow more
slowly than it has been growing," he said.
"But the question is can we find a way of making it grow slightly more slowly
than the economy is growing?
"If we can have a sensible debate about that, then we can avoid these `slash
and burn' accusations which really don't get us anywhere."
He added: "The choice at the next election will not be about whether government
spending should rise, but about how fast government spending should rise and
about how that money is spent."
But Cabinet Office Minister Douglas Alexander said Tory proposals would mean "immediate and massive cuts" across public services.
"We will be challenging Conservative candidates in every seat in the country
now to explain to their electorate which school, which hospital, which police
station will be closing as a result of the massive cuts that would be imposed by
Oliver Letwin," he said.