Disability Minister Mark Butler used a speech at the National Press Club on Wednesday to say the NDIS was not the right fit for children on the autism spectrum or with development delays.
A separate program called Thriving Kids will instead be set up to focus on those children previously covered by the NDIS.
It will begin rolling out from July 2026 and be fully implemented by July 2027.
"I know this will be hard for some parents to hear, and I don't say it lightly," Mr Butler said in the speech.
"We need as a matter of some urgency to create a better system that will enable our children to thrive.
"Diverting this group of kids over time from the NDIS is an important element of making the scheme sustainable and returning it to its original intent."
The minister said while one in 50 people had a significant disability which would be covered by the NDIS, one in five young children were on the autism spectrum or had a developmental delay.
Mr Butler said the changes would help to bring down the cost of the NDIS, with taxpayers set to fork out more than $52 billion for the scheme in 2025/26.
Laws passed in 2024 put in place a cap on spending growth of eight per cent per year.
But Mr Butler said the existing level of growth was unsustainable in the long term and a cap of between five and six per cent would be more effective.
"After we achieve our current target, a further wave of reform will be needed to get growth down to a more sustainable position," he said.
"There's no significant change in disability prevalence in the community, and the scheme is now fully rolled out. So growth should really reflect unit price inflation plus growth in Australia's population."
Of the estimated 5.5 million people in Australia living with disability, the NDIS covers fewer than 700,000.
Mr Butler's speech at the National Press Club follows the federal government's announcement of an NDIS Reform Advisory Committee on Tuesday to oversee how the laws are implemented.
NDIS Minister Jenny McAllister said the committee would ensure changes to the scheme were implemented with "transparency, integrity and accountability".Â
"Australians with disability, and those who care for them, deserve no less," she said.
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