The federal government's return to budget surplus relies in part on an unrealistic expectation of a smaller public service, an analysis by the Parliamentary Budget Office says.
About 40,000 public servants would need to be culled by 2036-37 - along with slashing the National Disability Insurance Scheme and allowing bracket creep to drive up tax revenues - to bring the budget back to balance, the independent budget watchdog said.
In a report published on Tuesday, the PBO pointed to the budget papers' forecast decline in the proportion of GDP to be spent on public sector expenses like wages, contractors, travel and general running costs, while agencies had to find savings to stay within their budgets.
Canberra Liberals ACT Senate candidate Nick Tyrrell accused Labor of trying to "have it both ways" after telling voters ahead of last year's federal election that the Albanese government was the only choice to protect the APS from cuts.
Finance and Public Service Minister Katy Gallagher said before the May budget that the APS is "largely the right size" and highlighted the forecast increase in ASL in an interview with The Canberra Times - while describing widespread redundancies as "a matter for agencies."
Treasurer Jim Chalmers declined to comment on the PBO's analysis of APS spending, saying only that the Albanese government was "getting the budget in better nick", had taken action on "some of the biggest structural spending pressures" and made "a lot of progress."
The government's position is that its budget development process, reporting of the APS average staffing level (ASL) and forecast of public sector spending are consistent with all previous budgets, including under the previous Coalition government, with policy decisions accounted for in the usual way.
In preparing the budget papers, Treasury assumes that all temporary government decisions will end as scheduled, lowering future headcount - but expiring programs often go on to be extended.
The PBO analysis assumes that departments' annual budget appropriations would continue under current arrangements, with the 1 per cent efficiency dividend - which Senator Gallagher has described as "largely a good thing" - remaining in place.
Senator Gallagher last year defended the dividend, which Labor committed to maintaining before winning government in 2022, saying it "puts the screws on agencies to always be looking at how they're providing services."
The budget projects spending on the public service to decline by more than 0.5 per cent of GDP over the coming decade.
In the PBO's analysis, this would require ASL - forecast to hit 217,256 this financial year - to fall to about 189,000 by 2029-30 (28,000 lower) and 176,000 by 2036-37 would be necessary to cut APS spending to the level forecast and enable the budget to return to balance by 2034-35.
But the PBO warned that significant cuts to the public service were unlikely to be achieved, noting that successive governments had historically failed to deliver such savings.
It pointed out that similar forecasts in previous budgets had failed to materialise, with public service spending remaining steady at about 3.8 per cent of GDP over the past 20 years.
"In practice, future budgets often include new resourcing decisions resulting in expense forecasts being 'topped up'," the report said.
The PBO found that, should ASL instead grow in line with the population over the medium term, spending on the public service would increase by $14.2 billion in 2036-37, delaying the return to surplus by one year to 2035-36.
Under this scenario, ASL would be about 226,500 (about 9000 higher than the 2026-27 forecast) at the end of the forward estimates and 244,500 (27,244 higher) at the end of the medium term.
In another scenario, with ASL at 216,000 (the 2025-26 level) over the medium term, the PBO found public service spending would rise by $8.5 billion in 2036-37, also delaying the return to surplus by one year to 2035-36.
The PBO also cautioned that the budget's assumption no income tax would be announced over the next decade was unrealistic.
If the government returned the proceeds of bracket creep to taxpayers each year, the budget deficit would widen from 1 per cent of GDP to almost 2 per cent by 2036-37, the PBO said.
Federal government revenue is projected to rise from 26.4 per cent of GDP this financial year to 27.4 per cent by 2036-37.
This would mean personal income tax collections would account for more than half (53.8 per cent) of all federal revenue.
