Treasurer Joe Hockey will ask parliament to lift the cap on borrowings to $500 billion to give the federal government room to cope with global economic uncertainty.
The federal cabinet decision comes as Mr Hockey announced that Business Council of Australia president Tony Shepherd will head a wide-ranging commission of audit to ensure spending is controlled and the debt ceiling is not breached.
The audit, which mirrors that undertaken by John Howard after he won the 1996 election, will look for ways the government can save money, remove duplication and raise extra revenue to balance the books.
Mr Hockey said he's been advised the existing debt limit of $300 billion would be reached on December 12 and was projected to exceed $400 billion by 2015/16.
"We need to move quickly to deal with this, particularly in the wake of what has been revealed in the United States in recent times," Mr Hockey said.
"This is a significant issue and we need to put it beyond any doubt so we do not have to revisit this issue again."
The government wants a buffer between $40 billion and $60 billion for "unanticipated events".
Mr Hockey said the commission of audit would help fix the "legacy of a bad Labor government".
Assisting Mr Shepherd will be former Howard government minister Amanda Vanstone, NSW prices watchdog chairman Peter Boxall, former Treasury secretary Tony Cole and former trade official Robert Fisher.
The commission will report on its initial work by January and finalise its report by the end of March.
Finance Minister Mathias Cormann says the previous Labor government had boosted government spending by $120 billion over the six years from 2007/08 - a real increase of more than four per cent a year.
The audit will look at whether the states, local councils, charities or the private sector can take on some of the roles now played by the commonwealth.
It will also examine the use of new technology to streamline services, privatising assets, new charges for services, merging agencies and the wide-ranging "anything that is reasonably necessary or desirable to improve the efficiency and effectiveness of government generally".
Senator Cormann said the only asset the government currently intended to sell was Medibank Private, with details released soon.
The commission is to find savings equal to one per cent of gross domestic product before 2023/24 and its findings will be adopted in the 2014/15 budget.
Opposition finance spokesman Tony Burke said the government was already breaking election promises.
"They have a commission which is aimed at cuts which will go all the way across all areas - areas we were told were immune are not immune," Mr Burke said.
"And the party that said they were all about turning around debt has now asked for permission to go to half a trillion dollars."
He said Labor would want to see updated budget projections before voting but would deal with the debt ceiling legislation "responsibly".
Public sector union boss Nadine Flood said such audits were a "shopping list for razor gangs".
Business Council chief Jennifer Westacott said the community should welcome the review as an act of a responsible government.
Institute of Chartered Accountants Australia chief Lee White said the commission needed to adopt a return-on-investment approach to cost savings to ensure savings in the long term.
"One of the central mandates of the commission should be to assess which policies and programs deliver a strong return on investment versus those that underperform," he said.
"Some savings measures could unintentionally have an adverse affect on our economic outlook, so they need to be talked through with experts and other stakeholders in the relevant industries to ensure they are structured correctly," he said.
Mr Hockey said the government's pre-election promises of paid parental leave and not making cuts to the budgets of health, education, defence and health and medical research would remain.
"But it doesn't mean that you can't identify waste in those areas and reallocate it to other priorities in the same portfolio," he said."The suggestion that there isn't waste in budgets of tens of billions of dollars is absurd. So what we've got to do is prioritise the expenditure in those areas but overall the envelope of committed expenditure in those areas will continue."