The Abbott government has suffered yet another blow to its beleaguered budget after being forced to retain tax cut compensation due to start next year, as well as the Australian Renewable Energy Agency.
Both were slated to go under the government's carbon tax repeal package.
Amid growing internal concerns about its management of the new Senate, which is dominated by the crossbench, the government was first defeated on a procedural motion to force the carbon tax repeal to an early vote on Wednesday, and then learnt it would be blocked on the proposed abolition of ARENA.
Otherwise pro-repeal Liberal Democratic Party senator David Leyonhjelm then combined with the Greens, Labor and other crossbench senators to keep $1.5 billion worth of tax relief due to begin from July 1, 2015.
However, the government argued it had already factored in the retention of Labor's second round of tax cuts, in light of the stated positions of Senator Leyonhjelm and the Palmer United Party. The developments capped off a day in the Senate marked by confusion and a sense the government has little feel for the various positions of the new players on key issues.
In a move nobody saw coming, Australian Motoring Enthusiast Party senator Ricky Muir refused to back the carbon tax guillotine motion even though he is aligned to the Palmer United Party, which backs the carbon tax repeal. The outcome left the government stunned, because it had counted the Victorian in its own column.
Senator Muir, the notional fourth senator in the PUP bloc, had proposed his own amendment to the carbon tax repeal package to save ARENA, prompting a flurry of negotiations.
In a last-minute deal with Clive Palmer, the amendment that would have further delayed the carbon tax repeal was withdrawn in exchange for PUP's support for keeping ARENA alive, albeit with reduced funding in the short term.
The agency, which undertakes research into new energy forms and methodologies, will now limp on until 2017-18, when its funding is likely to increase under the deal. After first thinking it would achieve its goal to scrap the carbon tax on Wednesday, the government now expects there will be a vote to repeal it by Thursday lunchtime.
The news was a big setback for the government, which this week alone has been rebuffed over some $10 billion in savings it had already booked in its budget projections from scrapping the mining and carbon taxes and a range of spending programs connected to them. Funding will now be needed to finance a lift in the tax-free threshold from $18,200 to $19,400, with more needed to keep ARENA going.
There are also addition costs associated with retaining the Climate Change Authority, the Clean Energy Finance Corporation and the Renewable Energy Target - all of which it had hoped to dump in exchange for its Direct Action policy.
Mr Palmer attempted to explain the outcome by suggesting it had been his preference all along
''We have decided to support the government's plans to reschedule the agency's funding,'' he said.
''The Palmer United Party will not vote for the government's other upcoming legislation that seeks to abolish ARENA altogether. I had extensive discussion with former United States vice-president Al Gore about ARENA and was convinced by his arguments in support of this important agency.''
The carbon tax repeal will cut ARENA's budget by $435 million and will enact a previously announced deferral of $370 million in funding by the former Labor government.
It will leave ARENA with only about $100 million over the next four years for new projects, but blows a $1.3 billion hole in the government's savings attempts, with that money committed to ARENA beyond the forward estimates.
However, the government believes it can negotiate over coming months to have that $1.3 billion figure significantly reduced.
''I have been a supporter of renewable energy for a long time and I am very pleased with this outcome,'' Senator Muir said on Wednesday. ''This is a win-win situation for the Australian Motoring Enthusiast Party, the Palmer United Party and the community.''