The country’s coalition government led by Chancellor Sebastian Kurz, along with Freedom Party leader Heinz-Christian Strache said they would press ahead with the cost-cutting drive, and are adamant it does not break EU rules banning discrimination.
Mr Kurz believes the move could save about €114 million.
The move though has been met with condemnation from other European Union countries.
MEP Romana Tomc, the former state secretary and candidate for the Slovenian presidential election, said the proposal was “unacceptable”.
She said: “Austria is turning children from EU citizens into first and second-class children by using this populist move.
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“Slovenes working in Austria pay equally into the Austrian social system like Austrians, why should they get out less?”
Ms Tomc asked the European Commission to clarify whether family allowance indexing amounts to discrimination.
She claimed this was prohibited under Article 21 of the EU Treaty.
The Commission has six weeks to respond to her request.
According to Ms Tomc, the plan would affect 10,600 children in Slovenia.
The Federal Government expects a total of 132,000 children – mainly in Hungary, Slovakia, Poland, Romania and Slovenia to be affected.
Ms Tomc said: “I am convinced that there is no majority in the Social Committee of the European Parliament for an indexation of social benefits.”
EU Social Affairs Commissioner Marianne Thyssen said that indexing requires too much administrative work.
In 2016, some €273 million of the €4.4 billion in Austria’s family allowances went to other EU countries.
Of these, most went to children living in Hungary – €53 million. If the indexation took place, this amount would shrink to €29 million.
Hungary’s Prime Minister Viktor Orban has already announced his opposition to this cut.
Austria’s plan is part of a broader government agenda that includes cutting taxes, reducing benefits for refugees and restricting new immigrants’ access to many social services for five years.
Mr Kurz’s cabinet was sworn in on December 18, two months after his conservative People’s Party won the parliamentary election.
It struck a coalition deal with the anti-immigration Freedom Party (FPO), making Austria the only western European country with a far-right party in government.
Austria borders eight countries, including the Czech Republic, Slovakia, Hungary and Slovenia, where wages are significantly lower.
Eastern Europeans make up a large part of its workforce in sectors including healthcare and construction.
Additional reporting by Monika Pallenberg