Defence personnel will get to keep $17 million in allowances but the government won't agree to a more generous pay rise.
Prime Minister Tony Abbott said he had listened to the concerns of coalition MPs who hold seats with high numbers of military families, after the Defence pay tribunal handed down a 1.5 per cent rise and cut allowances.
"All of us would like to see our defence forces paid more but what's possible with a $20 billion surplus is not always possible with a $40 billion deficit," Mr Abbott said.
"I think we just have to be realistic."
Allowances including discretionary leave, food and motor vehicle allowances will remain.
However, the Defence department will have to find savings in other areas in order to cover the cost of the allowances.
Independent senator Jacqui Lambie, who has vowed to vote against all government bills until Defence personnel get a better deal, said she was not satisfied.
She said personnel deserved a three per cent pay rise, which would deliver them a real rise when inflation is taken into account.
Opposition Leader Bill Shorten also backed at least a three per cent rise, adding the allowance changes were "too little too late".
"Tony Abbott loves to talk about rebooting and taking barnacles off the hull of his budget but there are no Australians who support implementing a real pay cut for our Defence forces," he said.
Mr Abbott told parliament no public sector worker would be paid at a higher rate than Defence personnel.
AAP understands Employment department staff are to be offered a 1.4 per cent rise staggered over three years, with cuts in allowances and the shedding of 46 jobs.
Centrelink and Medicare staff are also anticipating a raise of one per cent, while the Australian Crime Commission has been offered no increase, the Community and Public Sector Union says.
Mr Shorten tabled in parliament a 60,000 signature petition from Defence force families and veterans calling for a better pay deal.
Petition spokesman Tony Dagger, whose son is in the RAAF, said the pay cut was an "absolute insult".
A first year private in the army is paid $57,000, while a captain can earn up to $120,000. Those on deployment are also paid a tax-free allowance of up to $200 a day.
The Defence budget released in May included 3.9 per cent annual growth in funding over the next three years, which Mr Shorten said proved a more generous pay offer could be made.
Treasurer Joe Hockey told parliament the extra money set aside for pay in the budget papers accounted for a rise in the number of personnel.
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