Open source software allows users to read and alter code

George Osborne said the savings would cut 5% off Whitehall's annual IT bill.

He called for a more "level playing field" for all software companies, and urged "cultural change" in government.

Open source software allows users to read, alter and improve its code - in contrast to proprietary software where a company controls the source code.

In a speech on Thursday, Mr Osborne said that despite a government report in 2004 saying there would be "significant savings" in hardware and software if open source software was used, many government departments had not implemented it.

All too often a government IT system is incompatible with other types of software, which stifles competition and hampers innovation George Osborne Shadow Chancellor

"The problem is that the cultural change has not taken place in government," he said.

He listed various countries which have successfully used open source software for government projects, including Japan switching its entire payroll system over with an expected halving of costs.

In the UK some public bodies had used open source software, such as Bristol City Council and Carmathenshire County Council, with savings.

The Department for Education and Skills found that on average primary schools using open source software cut IT costs per PC by 50%, he said.

Transforming politics

Using open source software was about "better and more effective government".

He criticised government IT procurement for lacking "open standards" and making it difficult for small companies to get the contracts.

"All too often a government IT system is incompatible with other types of software, which stifles competition and hampers innovation.

"Looking at the litany of IT projects that have collapsed or spiralled over budget, it's clear too that this has meant billions of pounds wasted and public service reform being hampered," Mr Osborne said.

"The government's approach needs to be overhauled."