A multi-billion-dollar levy on Australians designed to fund the National Disability Insurance Scheme (NDIS) will be axed, the ABC can reveal.

Key points: Raising the Medicare levy from 2 to 2.5 per cent was a key 2017 budget measure

Raising the Medicare levy from 2 to 2.5 per cent was a key 2017 budget measure It would have raised $8 billion for the NDIS over four years from this July

It would have raised $8 billion for the NDIS over four years from this July The Government struggled to get enough support in the Senate to increase the levy

The Federal Government will ditch its plan to lift the Medicare levy from 2 per cent to 2.5 per cent.

Treasurer Scott Morrison said the measure would ensure the NDIS was fully funded, and would have raised $8 billion over four years from July 2019.

An average wage earner would have paid an extra $375 in tax.

What you earn Extra amount you would have paid $25,000 $125 $50,000 $250 $75,000 $375 $100,000 $500 $125,000 $625 $150,000 $750 $175,000 $875

Mr Morrison made the levy increase the centrepiece of his post-budget speech last year and became emotional as he told the story of his brother-in-law Gary Warren, who suffers from multiple sclerosis and relies on the NDIS.

"I'm not saying no to Gary and the 500,000 Australians counting on this," he told the room.

"It was with him particularly in mind that these measures have been brought forward by me as Treasurer in [the 2017] budget and that these bills now find their way into this house," he said at the time.

Sorry, this video has expired Federal budget 2017: Scott Morrison's speech in full

Mr Morrison will use a pre-budget speech tomorrow to say the levy increase is no longer necessary because the Government can find the $8 billion elsewhere.

The Treasurer says tax receipts were running $4.8 billion higher than expected in December and there's been a $3 billion increase in company tax receipts.

"This decision will withdraw the Medicare Levy increase and associated revenue from the forward estimates and ensure that all Australians who pay the Medicare levy will now not have to pay more," Mr Morrison said.

"This has been preceded by the Government taking action to get spending under control, employing a strict budget policy on each department."

But Federal Labor opposed the plan, arguing it was unfair especially to those on lower incomes.

Opposition Leader Bill Shorten used it to attack the Government by contrasting it with the company tax cuts.

"There's nothing fair about making middle-class and working-class Australians pay more, while millionaires and multinationals pay less," Mr Shorten told Parliament last year.

The Labor leader has argued that opposing the Medicare levy increase put the Opposition "one tax cut ahead" of the coalition.

The Opposition would only back an increase for people in the top two tax brackets — those earning more than $87,000.

It was not clear whether the Government could get enough support in the Senate to increase the levy.

However the Australian Medical Association recently argued strongly to increase the Medicare levy in all tax brackets to ensure the NDIS is fully funded.

Backdown leaves road clear for tax cuts

Abandoning the Medicare levy increase is a dramatic backdown on the announcement Mr Morrison made only a year ago and means the Government can no longer count on the revenue it would have raised.

It is especially awkward because Mr Morrison invoked his family and argued so passionately about it to ensure the NDIS was fully funded.

But it removes one of the major political hurdles the Government faced.

The Government is expected to announce broad scale income tax cuts in next month's budget.

This could have been difficult to explain because it would have conflicted with the Medicare levy — effectively an increase to taxes announced last year.

The ABC understands not everyone in the Government is comfortable about the decision to dump the levy hike, because of the revenue loss.

It is a strategic decision and a sign the budget will be intensely political, aimed at allowing the Government to attack Mr Shorten as the high taxing alternative.

The Government intends to paint Labor as the party that would raise taxes on housing, superannuation and energy.