The Commonwealth Ombudsman has launched an independent investigation into the Centrelink debt recovery scheme, which was been described as a "diabolical" failure by industry experts.

The automated scheme has produced nearly 170,000 notices of potential overpayment since July, with many Australians incorrectly told they had outstanding debts.

The Government has defended the system — that cross-references employment data from the Australian Tax Office and Centrelink — despite the Opposition describing it as "brutal" and "poorly designed".

In a statement provided to the ABC, Commonwealth Ombudsman Colin Neave said he commenced his own investigation into the scheme and was considering issues "on a systemic level".

Independent MP Andrew Wilkie and senator Nick Xenophon referred the Centrelink system to the Ombudsman late last year after being contacted by concerned constituents.

Labor has also called on the National Audit Office to investigate the system, with Anthony Albanese accusing the Government of scaring vulnerable Australians into paying debts they did not have.

Social Services Minister Christian Porter and Department of Human Services spokesman Hank Jongen rejected claims the automated notices were "debt letters", saying Australian had a chance to correct the record.

Sorry, this video has expired Centrelink says automated system working fine despite public backlash.

'Radical upskilling of the public service needed'

Paul Shetler, the former head of the Digital Transformation Agency, said the debt recovery system had "diabolical" consequences for many Australians and would likely be abandoned in the private sector, where consumers have greater power.

How the debt recovery system works: The system sends you a letter advising you of a potential welfare debt and asks you to review its figures online. It also sends an SMS

The system sends you a letter advising you of a potential welfare debt and asks you to review its figures online. It also sends an SMS When you log on you can update the information. You have 21 days from the date of the letter to go online and update

When you log on you can update the information. You have 21 days from the date of the letter to go online and update If you don't log on, Centrelink will make a default judgement its information is accurate. You will then be issued with a debt notice

If you don't log on, Centrelink will make a default judgement its information is accurate. You will then be issued with a debt notice If you do update the information, Centrelink may ask you to provide supporting documentation. This can include bank statements, letters from an employer, or payslips

If you do update the information, Centrelink may ask you to provide supporting documentation. This can include bank statements, letters from an employer, or payslips If you think the decision is wrong you can ask for a review

If you think the decision is wrong you can ask for a review If you or someone you know needs help, call Lifeline on 13 11 14

Mr Shetler said the Centrelink dramas came months after the botched Census collection, the temporary outage of the Australian Tax Office website, and problems with the MyGov portal.

"I wasn't exactly surprised because we have had a whole string of these things in Australia," he told the ABC on Monday.

"I was very disappointed, to be honest with you, because I spent 16 months of life trying to fix these things and make them better."

He said the Government needed to put the needs of the public first and deliver a radical transformation of an under-skilled public service.

"We need to have radical, radical upskilling of the public service so it can feel comfortable with 21st-century technology," he said.

"Governments should be able to use state-of-the-art technology; it is outrageous that we can't."

Mr Wilkie sympathised with public servants at Centrelink last week and said they were dealing with very angry and scared people.