The new £311 million Home Office headquarters will lack the space necessary to accommodate David Blunkett's army of civil servants, the National Audit Office has said.

Despite the observation, parliament's spending watchdog concluded that the PFI project still represents good value for money.

From 2005 the building, which is currently being built at a site just minutes from the House of Commons, will provide a base for 3450 of David Blunkett's civil servants.

However, there has been a significant increase in Home Office and Prison Service staff numbers in central London.

Total staff levels have risen from a total of 3200 in 1998 to 4900 in 2003.

While staff projections for 2005 are subject to review, if numbers remain constant there will not be enough space for all staff.

Options are currently being considered and a decision is expected by no later than mid-2004, the NAO said.

Despite the failure to house all the department's staff, the project will replace inadequate existing accommodation with a more flexible working environment that is expected to deliver business benefits.

Monthly payments, stretching out over the 26 year life of the project, will cover the costs of the new accommodation and associated services.

The NAO said that the PFI competition to construct and manage the new office block had been well run, resulting in a "good price" for the financing.

The deal has been co-ordinated with other departments' accommodation requirements, so despite the lack of office space the Department for Constitutional Affairs appears set to take over the Home Office's surplus leaseholds.

"Through this PFI deal, the Home Office should gain a good quality working environment at a good price, that will support the way it wants to work in the future," said NAO chief Sir John Bourn.

"However, risks to the accommodation strategy remain and must be managed well.

"In particular, I urge the Home Office to decide how excess staff will be accommodated soon in order to determine the budgetary implications and manage staff expectations."

Liberal Democrat home affairs spokesman Simon Hughes said the report showed the government should "get its act together".

"If the Home Office continues to churn out legislation and extend the reach of its empire, it is bound to need an ever-growing headquarters," he warned.

"The tragi-comedy of the Home Office is that it gives itself more and more to do but keeps failing to do it.

"There is a strong case for shrinking the Home Office, removing its responsibilities for asylum, and transferring its justice functions to a Ministry of Justice."