The head of the Prime Minister's department fears the public service is at risk of a "fatal combination of arrogance and ignorance" and has expressed surprise at the complacency of many staff.
Martin Parkinson was reflecting on his first year as secretary of the Department of the Prime Minister and Cabinet.
He said the public service had failed to recognise the effects of disruptive forces on the sector.
"It seems to be that in the APS we think disruption is something happening to other people, and conversely we seem to regard innovation as a buzzword or something that's nice to have," Dr Parkinson said.
"I want to be clear: this is a false reality, and a dangerous one at that. And it feeds into my concern that the APS is at risk of the fatal combination of arrogance and ignorance.
"I know we have had it ingrained in us for so long that failure is inexcusable that we have either risk managed the life out of decisions or we have simply refused to admit they were, in fact, failures ... but if we are going to truly create a safe space for people to think and innovate, we need to create better frameworks to test ideas."
Dr Parkinson also said Australians' unwillingness to acknowledge the economic risks the nation was taking was hampering its quest to reach budgetary surplus.
Australia is expected to be back in the black by 2020-21 – more than a decade after slipping into deficit and eight years later than the first projected surplus.
Dr Parkinson said it was "easy" to blame the Senate for Australia's economic outcomes but said Australians should instead take a look in the mirror.
Rising inequality was leading to a backlash against free trade, globalisation and immigration, the celebrated economist said, but a resilient economy required a commitment to productivity growth and "fundamental openness to trade and investment".
"It is the fragmented vision of Australia's future that causes the biggest difficulty today - and it is that fragmentation which is behind the composition of Parliament," Dr Parkinson said.
"Efforts to return to fiscal health are hampered by the unwillingness of the community to acknowledge the risks Australia is taking.
"But if the community will not acknowledge it today, watch how they attribute blame if the ratings agencies remove our AAA rating."
Dr Parkinson spoke on Tuesday night at the Institute of Public Administration Australia's annual address to the public service.