Senior probation officers have told the Guardian that some life prisoners are being kept behind bars for two or three years too long, simply because their overstretched service cannot provide the reports which the parole board needs to consider their release.

The delay in parole reports - a scandal which eventually may see the government sued for wrongful imprisonment - is overshadowed by an even graver problem, the effective collapse of the probation service as an instrument for tackling the causes of crime. From the most junior ranks to some of the most senior managers, probation staff use the same word to describe the state of their service: "Chaos."

Its financial state is so bad that in January the central directorate had to ask each of the 42 areas to give back 2% of their annual budget. Eleven of the areas are believed to be appealing, and a majority of areas are forecasting a real cut in their spending next year with recruitment freezes, cuts in training and cuts in funds for partner agencies. Last year, the Treasury clawed back £10.2mfrom budgets, and 37 of the areas then missed their performance targets, and were fined a total of £4.3m.

Morale is low.The service has just gone through an exhausting restructuring, only to find that it is now to be restructured yet again to fit into the new national offender management scheme. Some senior figures fear this will impose a new layer of regional bureaucracy with a complex regime of commissioning services from competing private and public suppliers. Meanwhile, the London service, which has been struggling particularly badly, is going through its own restructuring, with borough offices being split and merged into new quadrants, and a new tier of senior managers.

Staff are overburdened. The service has just over 1,000 unfilled vacancies. In the year to April 2003, probation nationally recruited an extra 2,879 staff, and lost 2,406 to exhaustion and bad morale. There has been a sharp fall in the number of senior staff and fieldwork officers. And yet, according to the probation inspectorate, the service workload has increased by 30% in the last 10 years. In 1992, the service provided 247,000 pre-sentence reports for the courts; in 2002, they provided 315,000. In 1992, they supervised 132,000 offenders; in 2002, they supervised 172,000.

The result, according to probation staff, is that traditional casework has collapsed: they do not have the time or resources to rehabilitate offenders. Supervision, they say, often means no more than providing a book for offenders to sign to prove they came to the office; the psychometric tests, which offenders are required to take, sit in piles without being analysed. The potential effect of the service is reduced: 56% of those on community sentences reoffend within two years; where community sentences are given to young men with previous convictions, more than half reoffend within just six months.

These structural strains have been aggravated by the creation three years ago of a new national probation directorate. This has opened up the service to political control from the centre, aimed at "rebranding" probation, which was created to advise, assist and befriend offenders, but which is now described as "a correctional service". The discretion of probation officers to decide how to handle offenders has been usurped by a regime of ring-fenced funding and more than 60 performance targets, enforced by a central bureaucracy which has grown from 90 to 460 since April 2001.

Some of the results have been disastrous. The promising initiative to use cognitive behaviour therapy to cut reconviction rates among suitable offenders by up to 15%, was forced off course by a central target, requiring 30,000 to go through the programme in its first year. Unsuitable offenders were sent on the course, who lacked the motivation and the communication skills to complete it. Three years later, Home Office researchers have found that half of them never turned up at all; a quarter turned up a few times but then faded away; and only a quarter finished the course.

Worse, the researchers have found that, although those who were suited to the course completed it and show every sign of having been improved by the experience, those who turned up and then stopped show clear evidence of an increase in the scale and seriousness of their offending. Probation officers also admit privately that in order to hit the Home Office target, they recycled the names of offenders who failed to attend.

Centralized control has seen all 42 areas compelled to sell all their buildings and then pay for rent and maintenance.

Apart from the financial burden, this has removed from probation hostels the cleaners and security staff who were once the frontline contact with residents and replaced them with outside contractors. More funds have been siphoned off into ill-conceived and badly run computer schemes, according to senior managers.

One of the most senior managers in the probation service said: "In three years, we have gone from world leader to complete chaos." A senior Home Office official with a special interest in probation said: "A lot of people in probation think that the role the probation service is playing now is ignoble."

Ó OCOI Studios, 2004