The Auditor-General has strongly criticised the Defence Force for the way it has handled the replacement of hundreds of soldiers with civilian positions.
Military staff were discharged and transferred into civilian positions or replaced with civilians.
The Defence Force committed to converting 1400 positions before knowing how many soldiers it would need from 2015.
The report, released by Auditor-General Lynn Provost on Wednesday, says the Defence Force is now short of soldiers, affecting its ability to fulfil its obligations.
The report says that is partly because of the way the transition was carried out, upsetting many involved, leading to a drop in morale and more soldiers leaving the force than expected.
The changes have not achieved the expected level of savings, it says.
But the Chief of the Defence Force says it is achieving the tasks set out for it by all agencies - including the police, fisheries and Customs.
Lieutenant-General Rhys Jones told Radio New Zealand's Checkpoint programme on Wednesday the current targets are too generous and need to be looked at.
The Defence Force said the report reflects what it has already taken on board from its own staff. Further change would be more gradual and made through attrition, rather than redundancies.
Defence Minister Jonathan Coleman described the Auditor-General's findings as old news and said the problems have been fixed.
But the Labour Party says the Government has caused unprecedented damage to the Defence Force by demanding up to $400 million in savings a year.
Acting defence spokesperson Phil Goff told Checkpoint the changes have been a disaster and parallel the Government's bungled changes in Foreign Affairs.
"The morale in the Defence Force is at the lowest level in the history of surveying by the New Zealand Defence Force itself. Attrition, in the middle of the worst unemployment we've had for 14 years, is 22 percent."
Mr Goff said the disaster is the direct result of National's decision to cut Defence Force spending and Jonathan Coleman must take responsibility.