Commonwealth spending on consultants and contractors has skyrocketed to well in excess of $1.2 billion a year as it increasingly draws on external expertise to undertake tasks once performed by public servants.
Figures compiled by the Thodey review show that in the four years to 2016-17 government spending on labour contractors soared, more than doubling to reach $738 million a year, while expenditure on consultants jumped from $386 million a year to $545 million, an increase of more than 40 per cent. Over the same period, spending on public servant wages was flat.
The review said the government's growing reliance on consultants and contractors had given rise to "credible" concerns that the capabilities of the Australian Public Service were in decline, including a "hollowing out" of strategic policy skills.
"These increases have occurred against the backdrop of a significant increase in the size of the programs administered by the APS but almost no increase in departmental budgets," the review said.
"The data suggest that contractors and consultants are being used to meet the increased burden of program delivery - work traditionally done by APS employees - as well as policy design and implementation."
The review's analysis has been rejected by Finance Minister Mathias Cormann, who said claims of a significant jump in government spending on consultants were "simply untrue".
Senator Cormann said the spending on consultancies, as a proportion of total contract notices by value, remained at around 1 per cent, and that the total cost of government administration (including spending on consultants and contractors) as a proportion of overall expenditure had fallen in the past decade from 8.5 to 7 per cent, and would reach 5.4 per cent by 2022-23.
"That unequivocally disproves the inaccurate assertion that broadly maintaining the size of the public service at the 2006-07 level has led to material increases in spending on contractors and consultants," he said. "If that had been the case the overall cost of government administration would have increased or at least stayed the same."
But observers noted that whereas Senator Cormann referred to contractor spending as a proportion of overall government expenditure, the Thodey review's analysis was based on the amount spent on external expertise and support.
In its response to the Thodey review, the government flagged possible changes to rules and guidance on the APS's use of contractors and consultants.
A Centre for Procurement Excellence has been established in the Department of Finance and the Secretaries Board, comprising all department secretaries, the APS Commissioner and the Director-General, National Intelligence, will consider whether a new framework is needed.
But Prime Minister Scott Morrison made it clear in a speech to public service leaders in August that he expects even greater use of external expertise in future.
"We need the public service to be more open to outsiders. Information has never been more available and expertise in our society has never been more dispersed," he said.
"The APS needs to be world-class at collaborating with external partners on all the challenges we face as a country."
The Thodey review acknowledged that the APS could not hold all expertise in-house and contracting out was often the most efficient way of obtaining the best services and advice.
But it voiced concern that the balance between nurturing APS skills and talent and hiring outside expertise had gone awry, particularly as a result of the government's tight staffing caps.
The caps had made it difficult for departments and agencies to sustain strategic policy capabilities and perform core functions like program management, it said.
"While the caps have undoubtedly achieved efficiencies across the service...they now risk the unintended consequence of reducing capability across the service," the review said.
It recommended removing the caps, but the government has rejected the suggestion.
Australian National University Professor of Public Policy Andrew Podger said in addition to the caps, public service capability was being undermined by the increasing demand of ministers and their advisers for short-term rather than strategic advice, and their declining interest in policy research.
Professor Podger said the erosion of the APS's capability was concerning because its role was not only to deliver services and implement the government's agenda, but also to provide an apolitical and independent source of advice to government, and to bring to its advice a depth of real world understanding and experience.
At a time when governments and ministers were increasingly pressured by lobbyists and think tanks, "the disinterested position of the public service is vital for the public interest", Professor Podger said.
The Abbott government introduced APS staffing caps in 2015, promising to hold public service staffing at the 2006-07 average staffing level of 167,596. It imposed the cap after slashing more than 16,000 jobs from the APS in two years.
Community and Public Sector Union National Secretary Melissa Donnelly said the cuts, together with the increased use of consultants and contractors, was damaging the bureaucracy.
"Essential skills are being lost, and the capacity of the APS is being hollowed out, while valuable funding is being wasted on expensive contracting," Ms Donnelly said. "Scott Morrison's short-sighted refusal to lift the ASL cap is costing Australians access to services."
But Lecturer in Public Management at the Melbourne School of Government Marty Bortz said arguments over where expertise was best located - in the public service or private sector - were ideological.
Mr Bortz said both the public and private sectors had strengths and weaknesses and the challenge was how to effectively harness both to achieve the best outcomes.