About 750,000 children will be excluded from a sport and arts program, saving the NSW government an estimated $163 million a year.
Premier Chris Minns rejected accusations by Opposition Leader Mark Speakman the changes were a broken promise to NSW families, saying "crippling debt" meant the state had to make tough decisions.
Prior to the election, Mr Minns said he would roll over the Active Kids and Creative Kids vouchers in a "similar" way to the existing program.
"We're not breaking our election promise. We're keeping Active Kids, but we're doing it in a responsible way," Mr Minns said.
From next year, eligible families can apply for two $50 vouchers each year, issued at the start of Term 1 and Term 3, to help cover the cost of participation in sports or creative fields.
The new vouchers will only be available to families receiving Family Tax Benefit Part A, encompassing roughly 600,000 out of a total 1.35 million schoolchildren across NSW.
For most single-child families, the tax benefit caps out once income hits $109,000 while a family of three teenagers can earn up to $141,000.
Previously two $100 Active Kids vouchers and one $100 Creative Kids voucher were available for all school-aged children each year.
Treasurer Daniel Mookhey said evidence from the program itself showed means-testing was the best way to direct help to the kids who need it most.
But hundreds of thousands of families would be worse off under the new scheme, Mr Speakman said.
"Before the election, Chris Minns promised to fund Active Kids vouchers, and after months of uncertainty families across NSW are paying for Labor's broken promise," Mr Speakman said.
The former government didn't allocate funding for the program beyond June 30 this year but had promised to continue it if re-elected.
With the state's debt level approaching $187 billion, cutting the program established in 2018 was a tough but economically responsible decision, the premier said.
"We don't think a reasonable person would expect the government to borrow money to continue this program," Mr Minns said.
"Ironically, the people that will have to pay off the Active Kids debt tomorrow, will be the people accessing the grant today, and we don't believe it's in their interests."
As an interim measure, the 2023 sport and art voucher program will be extended beyond July 1, with vouchers available to the lesser value of $50.
Starting from 2024, the new cost of the Active and Creative Kids voucher program is estimated to be $28 million per year, compared with an estimated $190 million in 2022/23 for the previous scheme, comprising of $136 million for Active Kids and $54 million for Creative Kids.
