MPs have accused ministers of "flying blind" and "shrugging their shoulders" at the scale of fraud - which has quadrupled since the start of the COVID pandemic.
The cross-party Public Accounts Committee (PAC) said while most of the £21bn of taxpayers' money lost to fraud during the pandemic is unlikely to be recovered, the government should be doing more to recover what it can.
On top of around £16.4bn lost to tax and benefit fraud in the past year, the government could have lost up to £28.5bn to fraud and error, without knowing exactly where or how, according to a PAC report, which is based on estimates from the Public Sector Fraud Authority.
MPs on the committee also accused the government of damaging public confidence in the integrity of government following the fourfold increase of public money paid to fraudsters in the two years of the pandemic.
They criticised the current system of fraud assessment for failing to reveal where problems lay or which public bodies were most affected.
Dame Meg Hillier, who chairs the committee, said: "The government is flying blind on the levels of fraud and corruption perpetrated against it, despite widespread awareness of the toxic threat posed by these despicable crimes.
"The Cabinet Office has blamed worsening public perceptions of the UK's fraud and corruption on 'noisy reporting' from the media.
"It is time for some noisy reporting back from the most senior government officials on quite how seriously it is tackling this worsening problem, with examples of fraud not being allowed to go unpunished."
She added: "The risk of fraud and corruption in public life, both from internal and external threats, is of course ever-present.
"But this should be spurring government to recognise and prepare for it as an ongoing risk, rather than simply accepting it.
"If senior officials and politicians simply shrug their shoulders and look away in the face of these outrages, then malign actors will continue to pick away not just at the public purse, but at the bonds of trust that knit us together as a society."
The PAC report follows a similar investigation by MPs in June which found the government had been "too slow" to recover taxpayer money lost to fraud and error over the pandemic.
'Extraordinary' waste down to poor preparation
The PAC said Whitehall needed a "step change" in its approach to risk in order to prevent a similar "panic response" in the future.
In a wide-ranging report, the group laid bare a number of "repeated problems".
Total fraud and error across COVID employment schemes delivered by HMRC was an estimated £4.5bn, of which the department expects to recoup just £1.1bn, PAC said.
The committee also found the Department of Health and Social Care wasted an "extraordinary" £14.9bn on PPE and related COVID expenditure across the last two years.
"No one could predict the COVID-19 pandemic, but we could have been better prepared," the report said.
"The scale of the losses incurred in a panic response on issues such as PPE procurement are documented in this report. We need to learn the lesson that there is always unpredictability."
The UK slipped to 18th - from eighth - out of 180 countries in 2022 for perceived corruption levels, according to Transparency International.
The government has been approached for comment.