Resisting calls to cut foreign aid spending to help push the budget back into surplus, the government will in fact increase it by $474 million, to $4.84 billion in 2011/12.
The boost means aid will now account for 0.35 per cent of gross national income (GNI).
But Foreign Minister Kevin Rudd says the government remains committed to boosting aid spending to 0.5 per cent of GNI by 2015/16.
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The budget contains new measures totalling $1.9 billion in spending over the next four years.
"Most of this new assistance will go to our region, particularly Indonesia and the Pacific," Mr Rudd said.
"Two-thirds of the world's poor live in Australia's region. Of our 20 nearest neighbours, 18 are developing countries."
Indonesia and Papua New Guinea will receive about $500 million each. Close to $400 million will go to Africa and the Middle East.
Oxfam Australia executive director Andrew Hewett applauded the increase.
"This is a good news story," he said.
"The money will save lives and help some of the world's poorest men, women and children."
ActionAid Australia chief executive Archie Law also welcomed the increase.
"It remains alarming that we lag behind other countries, as we are still ranked 14th of 23 donor nations," he said.
The Australian Council For International Development called the increase a "responsible move".
Elsewhere in the foreign affairs portfolio, the government will spend $10.5 million over the next two years to fund its controversial campaign for a temporary seat on the United Nations Security Council.
The Department of Foreign Affairs and Trade is boosting its spending on consular support by $4 million in the wake of recent natural and political disasters around the world.
