The Ministry of Defence has become so "top heavy" with senior ranking officers and civil servants that it will have to axe more than 700 top posts in the next three years, and another 335 before 2020, according to a confidential document leaked to the Guardian.

The cull will include rear admirals, major generals and air vice-marshals, as well as scores of more junior officers, such as captains and colonels, and civilians of similar seniority.

The scale of the cuts needed to balance the budget is set out in a document prepared by Jonathan Slater, the director general of transformation and strategy within the MoD.

Slater sets out why the department has become so bloated in recent years and urges quick action to address the problem. The leaked document, titled Defence Reform – Liability Review, was sent to senior officials last month and is unusually blunt in tone.

"The simple truth is that the defence senior cadre is larger than we can afford, is judged to be out of proportion with a reducing manpower base and also with modern working practices and societal tolerances."

It adds: "The perception, both within and beyond the department, that defence is bureaucratic and top heavy must be addressed. It undermines the confidence of our own staff, parliament, the public and media, and has a detrimental impact on the delivery of frontline and other defence outputs.

"Put simply, the size of the defence workforce has fallen over recent decades, but reductions in the numbers of leaders has not kept pace … the UK has a higher proportion of senior officers than the majority of our allies."

The document says the size of the most senior cadre within the MoD – one star and above – has risen by a third since 1990, and states there are too many layers in the present structures. "There is an urgent need to reduce our manpower costs … reductions must be reflected at all levels of the hierarchy," it adds.

Slater sets out some of the ideas the army, Royal Navy and Royal Air Force will have to adopt to get the numbers down – including a "presumption that the lowest possible rank should be used" for tasks – "commensurate with levels of risk".

The service chiefs have also been told to "identify which posts currently filled by the military might be delivered as effectively as a civilian … military posts should be limited to those requiring specific military skills and experience".

The number of support staff for senior ranking officers also needs to be thinned out, the document warns.

In a section headlined Indicative Reductions, Slater says he does not intend to set arbitrary targets for cuts – but then gives specific ones. He sets out in a table what he regards as the minimum requirement and indicates he will need a lot of convincing if the services disagree.

"The expectation is that the senior cadre would fall in accordance with the table … there may be reasons why this should not be the case, but these will need to be set out."

There are currently 3,620 middle-ranking civil servants and military officers – including Royal Navy captains, army colonels and RAF group captains. That number needs to have dropped to 3,011 by 2015, and to 2,724 by 2020.

This would mean axing 68 navy posts, 104 in the army and 86 in the airforce.

The next level up are the one and two star officers, and their civil service equivalents. Slater says the numbers holding the one star rank need to be cut from 550 to 461 by 2015, and to 423 by 2020.

For those holding two stars, including rear admirals, major generals and air vice-marshals, the totals need to be cut from 152 to 126, and then to 116.

Changes to the structure and responsibilities of the small number of the military's most senior officers – those with three and four star ranks – have been dealt with in separate reforms published earlier this year by Lord Levene.

This leaked document warns the service chiefs and civil service leaders that there can be no wriggling out of making tough decisions.

"I recognise that you will all be coming from different start points. However [the reforms] should be judged against two truths. There will be an expectation that our numbers of senior officers will drop in broad proportion with overall personnel reductions, and that our current ratio of senior cadre to personnel is too high."

The MoD has already announced plans that could see up to 60,000 military personnel and civil servants axed over the next seven years – it starts the second tranche of a redundancy programme in January.

But no details of what will happen in the higher ranks has been revealed until now. The sheer number of posts that need to go will provoke fresh consternation within the military – and among union leaders who believe the MoD is already suffering the effects of job cuts.

The MoD has been told it has until the spring to finalise its plans for job losses in the senior cadre, though it is unclear at this stage whether the loss of so many posts will inevitably lead to compulsory redundancies.

The MoD said it would not comment on figures in a leaked email.

A spokesperson added: "The current redundancy programme will reduce the number of service personnel, both officers and junior ranks, to ensure the armed forces are structured to best meet current and emerging threats.

"Following the Levene proposals the defence reform unit is conducing a review of senior officer posts to ensure the services are not top heavy."