Federal agencies entered Fiscal Year 2026 with efficiency and modernization at the top of the agenda, but a new survey from Ernst & Young LLP (EY US) shows that these ambitions are met by foundational barriers that could slow government transformations.

The 2026 EY Government and Public Sector (GPS) Federal Trends Report, commissioned by the EY Center for Government Modernization, surveyed 131 US federal government finance, IT, and HR leaders following the passing of the government appropriations bill in November 2025.

Findings reveal that surveyed federal agency leaders are unanimously undertaking efficiency initiatives in Fiscal Year 2026, primarily to enhance cybersecurity infrastructure (44%), invest in emerging technologies like AI and Machine Learning (43%), or implement new data systems (40%). However, despite these universal efficiency plans, systemic barriers persist. Federal government leaders said budget constraints (34%), outdated technological infrastructure (32%), and a lack of skilled personnel (31%) remain some of the key hurdles for agencies striving for efficiency.

"Federal agency leaders are under real pressure to deliver efficiency gains, but technology alone won't close the gap," said Paul Donato, EY Americas Government & Public Sector Federal Leader. "Modernization requires ensuring legacy environments are AI-ready, strengthening governance frameworks and investing in workforce capabilities. Federal agencies that align those pieces will move from incremental progress to meaningful transformation."

Tech modernization progress remains caught in "transformation limbo"

Federal agency leaders give their agencies high marks on their modernization efforts: eight-in-ten (81%) graded their agency either an "A (excellent)" or "B (good)" for performance in critical areas like updating legacy IT systems. Yet only 22% say a majority of their IT systems are fully post-transformation, and a quarter (26%) acknowledge they remain largely legacy-based.

A primary obstacle to tech modernization progress is not only how long it takes, but the critical human capital shortage. About half (48%) of federal agency leaders acknowledge that it often requires a year or more to move an IT program from pilot to full-scale deployment. The top barrier potentially undermining modernization goals is the workforce skills gap (44%), which ranks ahead of slow procurement (32%) and escalating cybersecurity threats (32%).

"The most significant bottleneck to tech modernization are the three S's limiting federal government agencies: speed, skills, and scale," said Donato. "Public sector leaders are trying to close the distance between the skills they have and the deep expertise they need to scale AI and secure their systems quickly. Without these capabilities, the most advanced tech remains underutilized."

AI adoption is accelerating, but remains hindered by legacy debt and fragmented governance

Federal agency leaders overwhelmingly view AI as a critical tool for driving modernization (88%) and improving efficiency (92%) within federal agencies, but actual implementation is largely stuck in the pilot phase. Only about half (50%) of federal agency leaders report multiple fully deployed AI initiatives, while the remainder are running pilot programs (38%) or are in the early stages of exploring AI and have not yet determined their approach (11%). In fact, 46% of federal leaders are still identifying AI for specific use cases.

Most federal leaders surveyed cite significant barriers to scaling AI technologies, most notably the difficulty of integrating with legacy IT systems (48%) and acute shortages of workforce skills and training in AI (44%). This challenge is compounded by a clear governance gap: only 38% of federal agencies have a comprehensive and unified AI governance strategy in place. This fragmentation may prevent many organizations from moving AI from pilot to production.

To read the full findings from the 2026 EY Government and Public Sector (GPS) Federal Trends Report, please visit: https://www.ey.com/content/dam/ey-unified-site/ey-com/en-us/insights/government-public-sector/documents/ey-federal-trends-report-the-modernization-and-efficiency-era.pdf.