The Abbott government faces a $700 million hit to the budget after the Palmer United Party decided it wants a second round of tax cuts and pension rises to go ahead.
The previous Labor government planned to roll out two rounds of tax cuts and pension and welfare rises as compensation for the rising carbon price.
But the coalition has pledged to only go ahead with one of the rounds, saying the second is unnecessary if the carbon tax is abolished.
It is understood PUP, which will have three senators in the new upper house from July 1, has agreed with the position of incoming Liberal Democratic Party senator David Leyonhjelm and Family First's Bob Day that the cuts should go ahead.
A spokesman said the decision has yet to be formally announced.
With Labor and the Australian Greens also standing by the compensation package, the government's plans look set to be frustrated in the Senate.
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