In a review of public service recruiting practices, the Australian National Audit Office says the current climate of high employment is making it difficult to retain workers and the public service fails to always properly monitor staff recruitment.

While employment increased by 6.5 per cent in 2006-07, many APS positions remained unfilled, with 88 per cent of departments reporting continued difficulty in recruiting people with the required skills.

And less than a fortnight before a budget expected to "take a meat axe" to what Prime Minister Kevin Rudd has termed "bloated" parts of the bureaucracy, the auditor finds recruitment practice needs substantial and widespread improvement.

"The nature and extent of changes in the employment environment pose considerable challenges for the APS to attract, retain and develop skilled and talented staff," the report said.

"In the face of skill shortages and changing population demographics, APS agencies are competing with each other and other sectors to fill jobs.

"Recruitment can therefore no longer be regarded as a soft issue, as the APS positions itself to succeed in a war for talent."

But the auditor notes the presence of the Rudd "meat axe" hanging over the service, saying that public-sector recruitment is cyclical and noting "the possibility that reduced growth in coming years may alleviate some pressure on agencies to recruit skilled staff".

"The nature and extent of changes in the employment environment pose considerable challenges for the APS to attract, retain and develop skilled and talented staff," the audit said. "Recruitment therefore can no longer be regarded as a 'soft' issue, as the APS positions itself 'to succeed in a war for talent'."

The auditor looked especially at the Tax Office, Comcare and the Finance Department, acknowledging they were fighting "a war for talent", as declared by the Management Advisory Committee, the forum of secretaries and agency heads which advises the Government on managing the public service, in a 2005 report.