Tony Abbott faces a $34 billion Budget hole after Clive Palmer vowed to block Government plans to axe a string of handouts to low and middle-income earners tied to the mining tax.
While the Prime Minister's plan to ditch the carbon tax appears on track, he faces fresh problems with the mining tax.
The new Senate's first business was the carbon tax abolition but in a sign of the chaos in the Upper House, Palmer United Party senators, who have said they will support the Government, sided with Labor and the Greens on a procedural motion.
Government Senate leader Eric Abetz accused Labor and the Greens of trying to block the Government's mandate for change.
"What the Australian Labor Party have been seeking to do is use the dead hand of the old Senate - the unrepresentative Senate - to reach out and stop and block discussion of this legislation, so that the impost and the damage being done by the carbon tax can linger on," he said.
Despite the setback, the Government is confident it will kill the carbon tax in coming days.
It is also likely to get Senate support for its Direct Action policy, with Environment Minister Greg Hunt hopeful that he will convince new senators that without it there would be a "gap" in addressing climate change.
A part of the carbon tax abolition, an increase in the tax-free threshold, will not go because PUP, the Liberal Democrats, Family First, Labor and the Greens support keeping the $1.5 billion tax cut.
A bigger problem is the Government's plan to abolish the mining tax and a string of measures financed by it.
PUP senators will, with the Greens and ALP, not support ditching the Schoolkids Bonus, the low-income superannuation contribution and the low-income support bonus.
Together with the tax-free threshold change, the policies are worth $2.4 billion this year and $9.1 billion over four years.
On top of a string of Budget measures that are unlikely to pass the Senate, they amount to at least a $34 billion blow to the Budget bottom line over the next four years.