The Prime Minister, Tony Abbott, will cut costs on his signature paid parental leave scheme to boost funding to childcare.
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In a major backdown, Mr Abbott said that he would restructure the scheme he has taken to two federal elections, so there is more money to "invest" in childcare.
It comes after widespread and long-term criticism of the policy, with those in his own party arguing his $5.5 billion scheme is too expensive, and parents and childcare experts calling for funds to be diverted to early childhood education and care.
On Sunday, Mr Abbott said he would spend the summer holidays working out the exact details of his revamped policy, but in a sign that his generous paid parental scheme offer would be means tested, said the new plan would be "better targeted".
In a further sign that the government is looking to fund other types of childcare such as nannies, he said he was "very keen" to look at in home care.
Mr Abbott described his new approach as "holistic".
"Once you have a child, if you want to stay in the workforce, you need childcare as well," he said.
The Prime Minister will take the new policy to Cabinet in the new year, giving the Government time to legislate the policy before a July 2015 start date. It will still be funded by a 1.5 per cent levy on big businesses.
It will be considered as the government also examines the final Productivity Commission report into childcare, which has not yet been released publicly.
Its draft report, handed down in July, suggested that the government divert funds from the paid parental leave scheme to improve childcare funding - a recommendation Mr Abbott dismissed at the time.
The current policy would pay new mothers their full salary plus superannuation for six months, capped at an annual income of $100,000. This was already revised down from an annual income of $150,000 in response to criticism about the cost of the scheme.
Mr Abbott's backdown comes after his insistence that he would not be changing his "signature" paid parental leave policy.
It also follows backbenchers from within the Coalition threatening to cross the floor to block it in the Senate as well as opposition from Labor, the Greens and Palmer United Party.
On Sunday, Mr Abbott said he was "ready to work with the Parliament to make this a reality".
"This is our time to get it right."
When asked if his backdown represented a broken promise, Mr Abbott said that "sensible governments" had to "look at what's happening in the community and respond".
The Opposition leader, Bill Shorten, and Labor's families spokeswoman, Jenny Macklin, seized upon Mr Abbott's planned changes, calling for the Prime Minister to release the details immediately.
"There could be no greater sign of just how much trouble Tony Abbott is in with his own colleagues," they said in a statement.
"He should have had the guts to put [the changes] to the Parliament - not wait until after the Parliament has risen for the years before announcing it."
But Mr Abbott was backed by his frontbencher Christopher Pyne, who said the proposed changes would not only be popular but economically and socially sensible.
Parenting advocacy group The Parenthood also welcomed Mr Abbott's decision on Sunday.
"Thousands of parents have been calling out for more funding to increase access to affordable high quality education and care," executive director Jo Briskey said.
