Although the government is committed to a 1% increase in equipment budget, the overall defence budget is not ring-fenced

The Ministry of Defence is used to being attacked by parliament's financial watchdogs – the Commons crossparty public accounts committee and the National Audit Office. But the committee's excoriating comments on Friday on the handling of the decision to slash the size of the army by 20% will hit a particularly raw nerve.

The army may be considered a suitable target given its withdrawal from Afghanistan by the end of the year and the extent of political opposition in the UK, and throughout the west, not to commit "boots on the ground" in future in conflict zones – a mantra repeated at this week's Nato summit in Wales.

But the army is in the firing line for even more cuts as Britain's defence budget comes under severe pressure over the next few years. Indeed, there are defence officials who warn that Britain will not be able to continue spending 2% of the country's GDP on defence – a Nato commitment much trumpeted by David Cameron. Britain and the US are among just four of the 28 Nato countries to meet this target.

Although the government is committed to a 1% increase in the equipment budget, the overall defence budget is not ring-fenced. And given the recent figures pointing to a growing economy, the proportion earmarked for defence could fall to well below 2%. Jonathan Eyal, international director at the Royal United Services Institute, describes the 2% commitment as a "badge of honour but also a millstone around the neck".

It is "remarkable" that Sir Peter Wall, head of the army, was not involved in the decision to cut his service given its magnitude and impact, say the MPs on the committee. They say they were surprised to learn that the MoD did not test the feasibility of recruiting and training the number of reserve soldiers it would need in the future. They were astonished to learn that the MoD withheld some evidence from the audit office.

The Commons public accounts also reveal that some 40% of the records the army holds on its soldiers did not contain details of medical fitness to determine whether they could be used on operations. The British army will not only be smaller than at any time since the Napoleonic wars, it may end up being the least fit to fight.

Army morale has not been helped by the decision to choose a private company, Capita, to manage the recruitment. The company missed its regular soldier recruitment target by 30% in 2013-14 and recruited fewer than 2,000 reserves against a target of 6,000, Friday's report says. Yet Capita was paid as though it had delivered the full 6,000.

At least £70m of the planned £267m savings from the contract has already been lost.

The MoD announced on the eve of the Nato summit than more than 1,300 jobs across the UK would be secured thanks to a £3.5bn contract to deliver 589 armoured fighting vehicles for the army. The Scout was designed by General Dynamics UK based in Oakdale, in south Wales.

This is unlikely to appease army chiefs. It certainly will not answer the question of how many further manpower cuts the army faces – at a time when the navy can look forward to two giant aircraft carriers, and a new fleet of Trident nuclear submarines.