KEVIN RUDD has been warned by his own MPs that treasured institutions that define the nation's culture and protect rights and freedoms will be devalued by his plan to cut their budgets under his election pledge to put a "meat axe" through the public service.

A unanimous report by the all-party public accounts and audit committee, headed by the Newcastle Labor MP Sharon Grierson, found that the across-the-board 3.25 per cent efficiency dividend demanded by the Government's razor gang would lead to false savings and reduced services.

It found that many small government agencies such as the War Memorial, High Court, Ombudsman and Sydney's National Maritime Museum would have to slash services. The Audit Office said it would have to cut the number of audits by 10 per cent.

"These small agencies, many of whom define our cultural outlook or protect our rights and freedoms, are being devalued through a focus on the big financial picture," Ms Grierson said.

Many such agencies were set up solely to perform specific and crucial functions and their already small budgets could not deliver the savings demanded, especially as many of their costs were fixed.

The report called for the first $50 million in funding to be exempt from the razor gang. If all government agencies enjoyed the exemption it would cost the budget $35 million a year. If it was limited to just those with a budget of less than $150 million the cost would be $25 million.

It would mean the War Memorial, Maritime Museum, High Court, Ombudsman, National Gallery and National Museum would escape the razor.

The report called for a new funding system for cultural institutions, saying cuts made it harder for them to deliver their legislated mandate to grow and develop their collections.

The Labor senator Kate Lundy urged the Government to adopt the report's findings. She said two decades of budget cuts and underfunding were taking their toll on the capacity of small agencies to perform their role. The extra cuts sought by the Government had "squeezed" them and their outlook was "dire".

"There is no more blood left in that stone," she said.

The inquiry called for increased funding for the auditor-general. "The Audit Office saves the Australian taxpayer significant sums of money each year through reduced opportunity for fraud, better accountability and improved agency performance," Ms Grierson said.