An immediate public pay freeze and shake-up of pensions is needed to plug Northern Ireland's growing funding gap, business leaders said.
Increased domestic rates and water charging were also proposed in a tough spending report from the Confederation of British Industry (CBI).
Northern Ireland will need to save up to £2 billion by 2015-16 as part of austere public spending cuts.
CBI Northern Ireland chairman Terence Brannigan said: "We must urgently redress the massive imbalance that exists between our public and private sectors. We have too many structures, with too many layers, employing too many people, often rewarded too highly, while delivering too little to the people who ultimately employ them - the citizens of Northern Ireland.
"Added to this, too often we appear reluctant to employ modern, cost-effective methods, systems and processes that would undoubtedly improve their quality and efficiency."
He said for up to three years private companies had been streamlining and downsizing, cutting wages and developing more affordable pension schemes.
"We now need to see similar action from the public service if Northern Ireland PLC is to achieve a level playing field that will address the chasm that exists between the public and private sectors," he added.
The report - Time for action: Northern Ireland - delivering public services in a time of austerity - calls for sweeping changes to all Government departments - particularly health, housing, education and policing and justice.
The report, which CBI Northern Ireland has been preparing for four months, said the public sector should share services more, cut sickness rates and open up markets to competition as a matter of urgency.
Nigel Smyth, director of CBI Northern Ireland, said the changes needed are substantial. "We can't make this kind of saving by tinkering at the edges or through efficiency savings alone, so we urgently need radical public sector reform," he said.