Jacqui Lambie's resignation from the Palmer United Party leaves the Abbott government with an ongoing struggle to balance the budget as the Senate resumes on Tuesday.
The government wanted to end the parliamentary year next week with the Senate passing billions of dollars in budget savings.
But the coalition will no longer be able to rely on the PUP's bloc of four votes.
At the heart of Senator Lambie's split with PUP, and gripe with the government, is what she considers to be a pay cut for Defence personnel.
If the government agrees to boost the pay offer, Senator Lambie says the Australian people will view Prime Minister Tony Abbott as a "better leader" and she will be open to negotiate on other matters.
The Senate on Monday passed a motion setting a December 1 deadline for Mr Abbott to ask the Defence Force Remuneration Tribunal to reconsider the offer.
The government may need to find other savings in the mid-year budget review due in December if it cannot convince the Senate to pass about $30 billion of measures.
The reintroduction of temporary protection visas and university fee deregulation also look unlikely to succeed without major changes.
