Prime Minister Tony Abbott and Treasurer Joe Hockey scrap Labor's proposed bank levy

The Abbott Government has dumped a Labor initiative to impose a bank deposit levy, causing a $2 billion hit to the federal budget over four years.

Prime Minister Tony Abbott and Treasurer Joe Hockey held a joint press conference this afternoon to declare the tax was "dead".

"Today we are announcing the end of Labor's bank deposit tax," Mr Abbott said.

"It was a tax on savings. It was a tax that was going to affect everyone with a bank account.

"Now is exactly the wrong time to apply such a tax to bank accounts, when people are receiving lower returns than they may have expected."

The bank deposit levy proposed by the previous Labor government was set to be a 0.05 percent levy on every deposit up to $250,000 and was scheduled to start on January 1, 2016.

The levy was expected to raise about $500 million a year, and cover the costs associated if a bank needed to be bailed out.

The Abbott government had factored in the revenue in its May budget, which means the budget deficit will grow even further.