The Australia Institute says Canberra will suffer an economic downturn similar to the mid 1990s if the Coalition goes ahead with plans to downsize the public service.
Opposition leader Tony Abbott says the coalition plans to reduce the public service by 12,000 positions if it wins the Federal Election.
Australia Institute's executive director Richard Dennis says its research has found the loss of jobs is likely to push the local economy into recession.
"There are whole sectors of the ACT economy that are set up to serve the public service," Dr Denniss said.
But then if you pull 12,000 pay packets out of the Canberra economy then far less money is going to be spent in shops, cafes and restaurants.
"Given that the Abbott Government is promising to make cuts that are substantially bigger than those promised by John Howard [in 1996], our report suggests that those knock-on effects will be much larger as well. "
Dr Denniss says the research indicates more than 5,000 private sector jobs would be lost as the economy shrank.
"In everything from IT and business services, through to cafes and retail.
"If you look at the projected economic growth for Canberra in the ACT budget papers, its not that strong and if you come and take 12,000 direct jobs and 5,500 indirect jobs out, then anyone who made that decision couldn't really be surprised that they'd pushed the local economy into recession."
The Canberra Liberals top senate candidate for the ACT says the report can not be taken seriously.
Zed Seselja says The Australia Institute report is not independent, and the group has Greens candidates on its board.
"The Australia Institute is not a non-partisan organisation, they are an activist group who effectively work side-by-side with the Greens to push a greens agenda," Mr Seselja said.
"I note that the Australia Institute is silent about the affect of the 10,000 plus jobs that the Labor party wants to take out of the public service.
"The Australia Institute can not be taken seriously. They are an activist group who actively pursue the green agenda.
"And they are in no way a serious economic think-tank."