Out-of-work Australians are “suffering” under the Coalition’s $7.3bn employment services program, according to a Senate inquiry report that prompted welfare groups to accuse the government of imposing a “harsh bureaucratic nightmare” on the unemployed.

Following the release of a scathing report into Jobactive, the Australian Council of Social Service lashed the program as “harsh and unreasonable” and noted Australia spent less than half the OECD average on employment services.

The Jobactive program has been earmarked for review by the government, with the contract with providers set to expire in 2020.

The inquiry report, released late last week, called for an overhaul of the program, which was resulting in people gaining employment “in spite of Jobactive, not because of it”.

“Jobactive is not welfare to work, it is welfare to nowhere,” the report said. “The government’s punitive and paternalistic approach to employment services has failed.”

The Labor-chaired committee argued for a review into the rate of Newstart and criticised the Jobactive program as “punitive” and in some cases “grossly unfair”.

“Participants are missing paid employment to attend appointments with their Jobactive provider,” the report said.

“The requirement to apply for 20 jobs every month burdens employers who are receiving masses of poor quality applications often from people who are not suited for the position.”

Among the flaws with the program was that jobseekers did not receive the “basic job-readiness services” they were meant to, while consultants had an average caseload of 150 participants. Providers were also “rewarded financially for churning people through jobs that don’t last”.

Goldie said the government needed to spend at least $500m in this year’s budget for employment services even to reach “at least half the OECD average level”.

“Many parents and carers returning to paid work need career advice, help with childcare, and training to refresh their skills,” Goldie told Guardian Australia.

“As the Senate inquiry report shows, most receive none of these things. Instead, people now face a harsh bureaucratic nightmare that often does not help them get work, threatens to suspend their social security payments, and floods employers with unsuitable applications.”

Labor has indicated a desire to reduce the job search requirements, a move the government claimed would undermine the bipartisan commitment to “mutual obligation” within the welfare system.

In a dissenting report, Coalition senators said while the jobactive program was “far from perfect” it had “performed well and at a lower cost” than previous programs.

“Around 50% of job seekers are in work three months after participating in Jobactive – compared to 42.5% for the last three years of the Job Services Australia model,” the dissenting report said.

The Greens senator Rachel Siewert said the government should scrap the compliance regime under which jobseekers lose payments for missing appointments.

Guardian Australia reported earlier this month that nearly 20,000 homeless or homeless at risk people had been given a “demerit point” warning under the “targeted compliance framework”. The inquiry report said more than half of homeless jobseekers had at least one demerit point, a penalty that usually comes with a payment suspension.

Overall, 42.5% of Jobactive participants have received at least one demerit point resulting in a payment suspension.

“In addition, over 4,000 participants have more than five demerit points and are already in the ‘penalty zone’ – resulting in reduction or cancellation of their payment,” the report said.

The report also called for a review into Work for the Dole, a contentious aspect of the Jobactive program that requires people to spend six months on a work placement.

Labor has said it will consider changes to Work for the Dole, but Siewert said the program should also be abolished.

Jeremy Poxon, a spokesman for the Australian Unemployed Workers Union (AUWU), said the committee’s report did not go far enough.

He called for a return to a publicly run employment services system.