Nearly 200 contractors are now employed as public servants at the agency following a government decision in May's budget to raise staffing limits, and another 120 labour hire workers will soon join its ranks of directly-employed bureaucrats.

But the chairman of an inquiry into the public service's skills, Labor senator Tim Ayres, on Tuesday slammed the government's decision to limit funding for those new roles to two years and force the department to offer only temporary roles.

"It's just a hoax, isn't it, for the veterans community that there is no permanent increase to the capacity of the department?" he said to department officials.

"These issues about the unsustainability of the labour hire arrangements have been traversed year after year.

"The response of the government is a mealy-mouthed grudging temporary increase to the capabiity."

His comments follow a government decision in May's budget to lift staffing caps in portfolios with heavy reliance on labour hire workers to meet high demand, after years of criticisms the limits had forced agencies to rely on contractors to cope with growing workloads.

Veterans Affairs officials told the inquiry the department had given many of its labour hire staff direct employment since the government raised its staffing cap, but confirmed all of the public service jobs it had offered so far were fixed term contracts.

Department chief operating officer Mark Harrigan said Veterans' Affairs would lower its reliance on labour hire staff through the decision, which would reduce the percentage of its workforce who were contractors in the claims processing team to 20 per cent.

The majority of the department's 447 new positions after the staffing cap decision would be temporary, as the additional jobs were only funded for two years. However the department would clear its backlog of compensation claims in that time, Mr Harrigan said.

Senator Ayres said the department would remain in the top 10 agencies with the highest percentage of labour hire workers in the public service, despite the increase in public service jobs.

The main public sector union told the inquiry that despite the government's decision to grow the department's in-house staffing in May's budget, Veterans' Affairs had filled only half the number of positions available under its staffing level cap.

Community and Public Sector Union national secretary Melissa Donnelly said the department was employing staff under temporary contracts despite projections showing client numbers would not stabilise within the next decade.

"We're concerned that this transition is not enough, it doesn't provide enough resources to provide support for all veterans," Ms Donnelly said.

Government services for veterans were struggling with a revolving door of labour hire staff and faulty IT amid faltering efforts to reduce a major backlog of compensation claims for ex-services personnel, the union told MPs.

Veterans advocates joined the CPSU on Tuesday in calling for more permanent staff at the Veterans' Affairs Department to reduce delays for former military personnel in receiving payment for injuries sustained during their service.

Union officials told the parliamentary inquiry into the public service that turnover in labour hire staff was further undermining the department's services, and that its blended workforce of contractors and permanent public servants had proven disastrous for veterans.

CPSU national secretary Melissa Donnelly told MPs the department was dealing with a "perfect storm" of rising demand and growing reliance on labour hire that was affecting the health of veterans.

The department was yet to process 4300 initial liability claims older than a year, and in December 2020 the number of unprocessed claims numbered more than 49,000, she said. Claims were averaging 178 to 186 days to revolve, depending on the category.

"These delays and backlogs directly impact the mental health of veterans," Ms Donnelly said.

"Instead of providing the permanent staff require to meet the ever increasing workloads, there's been a reliance on labour hire."

However, department official Mark Harrigan defended its use of both labour hire and public servants.

"The number one driver to our increase in labour hire has been the increase in workload stemming from veterans and their families reaching out for the support they need, which is a positive thing, that's our role, to provide them that support. We will do that however we need to, through the use of a blended workforce mix," he said.

Union officials also reported pressures on public servants and labour hire staff leading to poor mental health and high turnover inside the Veterans' Affairs Department.

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Labour hire staff were straining under high workloads but did not want to speak out of fear of getting sacked, union official Fiona Duffy said. After receiving 12 months of training, they would leave the department for more permanent work after 18 months, stopping Veterans' Affairs from retaining skills and knowledge.

"We're constantly fighting to keep staff, the good staff move off to permanent jobs," Ms Duffy said.

"It actually has a negative impact on productivity.

"And so it doesn't really have the impact on the backlog that you would hope, just throwing more labour hire at it isn't necessarily going to get through the claims, because the cost on the ground of having to manage a large cohort of labour hire in the claim space."

Some teams within the department were split evenly between permanent staff and labour hire, creating two different classes of workers as they had different employment conditions.

The CPSU also warned that a decision to share IT services across the bureaucracy had stopped Veterans' Affairs from answering questions from veterans and had left the department waiting weeks to resolve technology issues.

Ms Duffy said Veterans' Affairs had to wait in line behind other agencies for IT services since sharing them under an arrangement with Services Australia.

IT requests could take months to resolve and sometimes were closed without explanation, she said.

Defence Force Welfare Association national president Kel Ryan said the department should rely less on contractors and hire more permanent staff.

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