The Federal Government will reduce the baby bonus to parents by $400 starting September 2012 so it can save money.

The move is part of a $7 billion cost-cutting measure, which aims to produce a budget surplus of $1.5 billion before the 2013 elections, as planned under the Mid-Year Economic and Fiscal Outlook.

The government was forced to make the cut on baby bonus, currently set at $5,400, in the face of lower tax take from Australian stocks, which suffered losses due to the European debt crisis.

More than 160,000 children will be affected by the baby bonus cut but the government expects to save $358 million from the move for four years.

Meanwhile, Australian Council of Social Service warned that the move will affect low-income families the hardest. For Tim King and wife Aisla, who is pregnant with their second child, it was disappointing.

Tim said it was "not fair" the bonus was the target of the Federal Government's cutbacks to reduce spending costs and his family relied on the $5437 baby bonus when their 11-month-old son Arthur was born, according to Courier Mail.

Aside from the baby bonus cut, the government plans to slash living-away-from-home allowance and benefits and dependent spouse tax offset, defer tax reforms and increase visa charges to create budget savings.

The $400 cut on baby bonus is expected to hurt parents.