The context of this chapter is the relationship between the roles of government as an employer, as a prime generator of policy, as regulator and as financial controller. The overarching issue is the extent that it is possible to match the system regulating public sector industrial relations with the general policy directions of government, while the government maintains overall control of the nature and direction of state expenditure, particularly in a political environment that has encouraged the promotion and implementation of ‘small government’. It will be argued that there are significant limits to the decentralisation of public sector industrial relations given the overall fiscal, policy, regulatory and employer responsibilities of government, even if there is a strong policy to decentralise industrial relations processes generally. The chapter will consider, in particular, how employees and their organisations have responded to the attempts by government to decentralise the regulation of labour-management relations, whilst retaining control over their employees. This chapter will concentrate on the Commonwealth sector, although the trends outlined below have their parallels, as well as divergences, in the States and Territories. The discussion will be largely confined to employees working within the core public service as distinct from those employed in statutory authorities.