Finance Minister Bill English says job losses in the public sector are necessary to repay the Government's huge overdraft.
Mr English's comments follow claims from the Labour Party that the Government has broken its promise to cap core public service positions at just under 39,000.
Labour's state services spokesperson Grant Robertson told Morning Report on Wednesday the National-led Government knew the economy was in difficulty when it said public service jobs would be capped rather than cut.
But Mr English told the programme the capping policy on public sector jobs remains.
He said there has been hundreds of new jobs in sectors such as the police and the Department of Corrections.
Though Mr English conceded there have been job losses, he told Morning Report they are necessary to repay the Government's overdraft. He says the Government faces up to $12 billion deficits and it could take a decade to pay off.
On Tuesday, Mr English said the public service could not expect to be immune from the effects of the global downturn and its leaders have been given a year to work out how to handle financial pressures over the next three to five years.
He said that is a response to the recession and in line with the Government's policies.
"In the end, we have to deal with the reality that there is less money and certainly much less growth in public spending," he said.
"The public service has been accustomed to expenditure over the last five years growing at twice the rate of the economy - that certainly can't continue any more than it could continue for a household or a business growing its spending at twice the rate it was growing its income."
Mr English said significant changes are needed in the public sector and that could mean contracting out more work. He said the challenge is for the public sector to adapt to the new circumstances.
The Secretary of the Treasury said earlier this week the public service must do more to control spending.
John Whitehead said out-sourcing some state services would help boost the sector's productivity and warned that unless public servants identify more ways to save money, such decisions may be made for them.
Privatisation not the answer - union
The Public Service Association says privatisation is not a solution to improving the output of public servants.
The union's national secretary, Brenda Pilott, says such talk revives familiar and failed solutions from the past.
She says 1500 public sector jobs have been lost since the general election, and it is hard to see how the economy will be strengthened by sending more public servants to the dole queue.
Ms Pilott says the suggestions are ironic because bad management in the private sector created the current worldwide recession.
Business groups welcome rethink
Business groups on Tuesday welcomed the Treasury's call for a rethink of how the public sector works, saying New Zealand would benefit from more public-private partnerships.
Business Roundtable executive director Roger Kerr says New Zealand is lagging behind other countries in using public-private partnerships, which can be good value for taxpayers' dollars.
Canterbury Employers' Chamber of Commerce chief executive Peter Townsend says the model can work well.
But Engineering Printing and Manufacturing Union national secretary Andrew Little says more contracting out by the public sector will transfer costs to private companies and will not improve efficiency.