Australia on Thursday avoided a US-style shutdown after the government struck a deal with the Greens to abolish the nation's debt ceiling.

The current cap of Aus$300 billion (US$271 billion) was due to be hit next week, with Treasurer Joe Hockey warning of massive cuts to government expenditure if a resolution was not found.

A bill to raise the limit passed the House of Representatives last month, but there has been a stand-off in the Senate.

Labor and the Greens hold the balance of power in the upper house and wanted to cap the debt ceiling at Aus$400 billion, but the Tony Abbott-led government said that was not enough, and pushed for Aus$500 million.

After failing to drum up enough support for its preferred limit, the conservative government instead clinched a rare deal with the Greens to do away with the ceiling altogether.

"We have resolved this issue, after good faith and reasonable negotiations, and now can provide certainty to the markets about the government's capacity to finance the budget," Hockey said.

"We have done this with no thanks to the Australian Labor Party, who created the debt and did nothing to find a solution as we approached the binding limit. Labor has said they will oppose their own savings -- the hypocrisy is breathtaking."

In exchange for the Greens' support, the government has agreed to a host of transparency measures, including issuing statements to both houses of parliament every time it increases debt by Aus$50 billion.

Budget papers will also be expanded to better explain what the borrowings cover.

Greens leader Christine Milne was expected to introduce a bill to repeal the debt cap in the Senate on Thursday, saying she was fed up with the "hysterical debate about the phoney debt ceiling".

"Because of the Greens agreement, the public will now be able to see whether the government is incurring good debt to invest in our future, or bad debt to cover up a shortfall in revenue."

In October, the United States government was shut down for 16 days and taken to the brink of default as Democrats and Republicans locked horns over a budget bill and raising of the borrowing limit.

[Image via Agence France-Presse]