The Prison Service has been told to find savings of £80 million for each of three financial years from an annual budget of £2 billion.

The demand follows a deal between Charles Clarke, the former Home Secretary, and Gordon Brown, under which the Home Office budget will be frozen from next year.

Senior officials in the Home Office have asked the Prison Service to identify savings totalling 4 per cent – or £80 million – a year for each financial year between 2008 and 2011.

The scale of the savings has astonished senior prison staff, who are grappling with an overcrowding crisis in the battle to house 80,000 inmates, and who have told the Home Office that the cuts will be impossible to achieve.

As a result, an outsider has been drafted in to conduct a full review of prison service finances. Lord Carter of Coles, a friend of Jack Straw, the Leader of the Commons, and the man behind a 2002 review of prisons and probation, has been asked to determine whether or not the Prison Service is crying wolf over its insistence that such savings are impossible.

A Home Office statement said: “Lord Carter of Coles is working with the Home Office to conduct a value-for-money review of the Prison Service. The review will seek to identify the scope for further savings, building on the improvements in efficiency achieved in recent years.”

Prison governors reacted with incredulity last night at the scale of the savings that they have been asked to make by Sir David Normington, the Permanent Secretary, and Helen Edwards, chief executive of the National Offender Management Service.

One governor attending the Prison Service’s annual conference said: “It simply isn’t doable. Look at the pressures we are under.”

The demand for savings coincides with government plans to provide an extra 8,000 jail spaces by 2011 – many of them in units to be placed in existing prisons and requiring additional staff.

The service is already postponing the refurbishment of wings at jails in order to cope with the population crisis and is facing a huge bill for holding offenders in police cells.

Charles Bushell, the general secretary of the Prison Governors’ Association, said: “The prison service has for many years faced both huge increases in demand and reductions to budgets in real terms.”

He went on: “Any fat has gone, some of the meat has gone and we are now little more than skin and bones.”

He said that the population pressures on prisons and the rundown nature of some jails should mean that more money rather than less was available.

“If anything the increase in prison places which we fear will be required can only lead to an increase as more staff are recruited,” he said.

The National Audit Office suggested that further savings could be made in the service’s £94 million-a-year catering bill with an average daily food allowance of £1.87p per prisoner per day.

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