The conservatives and the far right party coalition announced its plans to cut benefit payments for children living abroad during a cabinet meeting in a castle near Slovenia.
The move will mean stricter rules are imposed on Austrians who claim benefits for children who live in a country where the cost of living is lower.
However, Chancellor Sebastian Kurz and Freedom Party leader Heinz-Christian Strache said they would press ahead with the cost-cutting drive and was adamant the move does not break European Union rules banning discrimination.
Mr Kurz said a legal paper commissioned by the government “clearly shows that it is legally possible to take these measures”, adding: “We have prepared this well.”
He said: “It is an unfairness built into the system that, for two children who do not even live in Austria but in Romania, roughly €300 a month are transferred to Romania and that is almost the average income there.”
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“Payments vary depending on children’s age and number but start around €114 a month for an only child.
”We will reach a decision in cabinet here so that child benefit payments are not made abroad to the same extent as before.”
Mr Kurz said adjusting payments to the local cost of living would save “more than €100million” a year.
The Government said it will create €2.5billion in savings this year from the change.
Mr Kurz said the move was being made so quickly because slashing benefits was an easy policy to prepare.
The 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.
The FPO controls the interior, foreign, defence and social affairs ministries, among others.
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.
In 2016 Austria transferred 273 million euros abroad to EU and European Economic Area countries in benefit payments for 132,000 children.
The European Commission criticised Germany last year for a similar plan to cut child benefits, which was later abandoned. It gave a guarded reaction on Thursday.
A Commission spokeswoman said:”We take note and we will examine the laws with regard to their compatibility with EU law if and once adopted.”