Sir Hayden Phillips, a former Whitehall official, said heavy poster and direct marketing campaigns had plunged Labour and the Conservatives into the red without boosting turnout.
He called on both parties to cut spending by £20 million over the lifetime of a four- or five-year Parliament. "I would much prefer parties to decide of their own accord - and in the context of new spending limits - that activities such as billboard advertising were wasteful rather than to see the state ban parties' posters," he said in his report.
The parties will now hold talks on a new agreement on how they are funded.
Officials predicted they would agree to scrap blockbuster poster campaigns and that only small local and tactical campaigns would remain.
"There will be the one-site campaign for the TV news bulletins, but little else," a Labour source said. But officials believe that parties will continue to spend "real money" on direct marketing.
Phillips also proposed that the ban on third parties such as pressure groups running political advertising on TV and radio should continue.
- Comment, page 36.