The decision to dump it could cost the budget $2 billion in lost revenue. It came as preliminary estimates from the Bureau of Statistics showed the budget deteriorating a further $1.3 billion in 2014-15. Revenue was $4.2 billion lower than expected, and spending only $2.4 billion lower. The 0.05 per cent levy was to be imposed on all bank deposits up to $250,000, with the money to be invested in a Financial Stability Fund as insurance in the event of a bank collapse. It was understood Mr Hockey, Finance Minister Mathias Cormann and Assistant Treasurer Josh Frydenberg had been arguing internally for the measure to help the government's revenue, but backbenchers had been pushing for the plan to be dumped arguing the revenue was not worth the political pain that would come with a tax. Mr Hockey denied this was the case on Tuesday and that he only ever planned to consult with the industry.

"You are wrong. We have been actively consulting with a range of different people including stakeholders and formed the view, after consultation some days ago - in fact, more than a week ago I spoke to the Prime Minister and said this is bad policy in light of the new capital requirements for the major financial institutions," Mr Hockey said. The Treasurer said it was now up to Labor to declare "their own deposit tax is dead". "They used this simply as a way of trying to fatten up the bottom line when they were in quite desperate straits," he said. "I have consulted widely across many stakeholders in relation to this tax, looked carefully at different options but there is no good option. The only good option is to abolish the tax and not proceed with it." Banking groups welcomed the move, which the Australian Bankers' Association said was "a wise policy decision and a welcome end to the uncertainty for savers".

"Millions of Australians who rely on their savings for current and future income would have been hurt by this tax, including many self-funded retirees," ABA's executive director of industry policy Tony Pearson said. Westpac chairman Lindsay Maxsted said the government's decision made his day. Mr Maxsted said the tax, widely opposed by banks, did not seem the "right thing to do" because of the way it would have affected banks' customers and investors. He also compared it to "bank bashing" in the United Kingdom, Europe and the United States, where he said regulators "keep putting new impost after impost on the banking sector." "Once you go down this path then many of us fear it's the thin edge of wedge," he said.

But Greens treasury spokesman Adam Bandt said it was a backflip that meant the big banks had won and the government had "blown another hole" in budget revenue. "Why make this announcement now? Has the public lost billions in revenue just so a Prime Minister and Treasurer under pressure could appear smiling together in front of the cameras?" he said. "The big four banks make world-leading record profits, yet the government doesn't have the guts to ask them to pay a bit more tax." with Clancy Yeates and Peter Martin Follow us on Twitter​