The Albanese government is considering forgiving up to a billion dollars worth of welfare debts instead of letting the Department of Social Services pursue the overpayments, despite a court ruling the debts could be recalculated and recouped.

After the Full Federal Court clarified the correct method for the government to recalculate debts owed, Department of Social Security secretary Michael Lye said the department would now start reassessing up to 160,000 welfare payments going back decades.