A scathing report from the NSW Auditor-General made the finding while probing the efficiency of custodial and post-release services designed to reduce Indigenous people reoffending.
Under national Closing the Gap targets set in 2020, states and territories aim to reduce the rate of Indigenous Australians held in custody by 15 per cent by 2031 and Indigenous juveniles by 30 per cent in the same time frame.
But NSW figures have worsened and the target is unlikely to be achieved.
The auditor-general found inmate security classification processes were not fit for purpose regarding Indigenous people, restricting their ability to access rehabilitation tools such as education, vocational training, employment and work release.
The system used to rank reoffending was not designed with First Nations stakeholders and disproportionately assessed Indigenous youth as high-risk, the report found.
"This is not due to a higher propensity for crime," the report said.
"But rather (it is) due to increased exposure to social inequality, which increases the risk rating.
"(It limits) their access to programs that support reintegration and exposes them to institutional barriers that contribute to cycles of incarceration."
The findings indicate the government's promises of meaningful justice reform are not being delivered, Greens MP Sue Higginson said.
"When people are turfed out of custody into the cold with no support and no path toward rehabilitation, they fall back into patterns of criminal behaviour," Ms Higginson said.
The scathing report found Corrective Services NSW and Youth Justice NSW had not appropriately tailored post-release support to ensure Indigenous people access culturally appropriate assistance.
The agencies have had five different strategies targeting Indigenous over-representation in custody since 2019, but have not tracked spending or outcomes and they did not hit their targets.
NSW Auditor‑General Bola Oyetunji delivered a damning assessment of their efforts to transform the system.
"The activities undertaken ... have had little to no impact on the rates of reoffending among First Nations peoples, nor alleviated pressure on an already overburdened justice system," the report said.
A government spokesman said culturally appropriate services for First Nations inmates were being developed.
"Youth Justice delivers intensive programs with an emphasis on health, education and cultural connection, work therapy and healing," the spokesman said.
More than 60 per cent of Indigenous adults released from custody reoffended within a year, compared with 42 per cent of non-Indigenous adults.
In the same 2023 data, more than 70 per cent of Indigenous youth released from custody reoffended within a year, compared with 49 per cent of non-Indigenous youth.
Australia recorded 33 Indigenous deaths in custody in 2024/25, the largest number since record-keeping began in 1979/80.
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