The coordinator-general for remote indigenous services, Brian Gleeson, will finish up when his contract expires on January 31.
The midyear economic and fiscal outlook reveals the government will save $7.1 million over three years by scrapping his office.
Australia faces decade of deficits, budget update shows
Mr Gleeson has been monitoring a national agreement, which expires in June, on remote service delivery between the Commonwealth and states and efforts to close the gap on indigenous disadvantage.
He reports every six months, fronts Senate estimates hearings and has conducted 149 visits to 29 remote Indigenous communities.
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A bureaucrat from the Department of Prime Minister and Cabinet will take on the scrutiny role for the last six months of the national agreement.
Mr Gleeson, who learned of the decision on Tuesday, said he would have liked to continue in the role, and that its independence had proved effective.
"I've built a personal trust and relationships with all the communities. They ring me up when they have an issue," Mr Gleeson said.
"Having a person in a bureaucracy doing the role may not have the same traction."
He was confident there was enough state, territory and the federal government support to come up with successor arrangements once the national agreement expired.
Indigenous legal aid funding is facing a $9 million budget cut.
Amnesty International condemned the decision, pointing to an increase in indigenous incarceration rates.
Meanwhile, the federal government is allocating $28.4 million over two years towards a remote school attendance strategy in 40 remote indigenous communities in the Northern Territory, WA, SA, Queensland and NSW.
It reportedly involves sending truancy officers to children's homes to take them to school, and could be in operation from the first term of 2014.
