A new report by the group Aidwatch has found that a third of Australia's aid programme does not directly benefit the fight against poverty in target countries.
This includes more than $US491 million which was paid to a Federal government agency to write off an Iraqi debt incurred in the early 1990s.
The Parliamentary secretary for Foreign Affairs, Greg Hunt, says the people criticising the programme are the same ones who have been calling for debt relief:
"There's a huge in-country benefit.
"All up western countries have wiped off about $AU22 billion worth of debt to Iraq.
"If you took that at 8 per cent of repayments a year, plus some repayment on capital, that's some $2 to $3 billion in money that's available to the the Iraqi government".
Non-government aid agencies say the Federal Government shouldn't be counting money spent on the Pacific solution as part of the aid budget.
Aidwatch says some of the aid programs do not directly alleviate poverty.
They include money spent on detaining illegal immigrants on Nauru and Manus island.
Jack de Groot from the Catholic overseas aid agency, Caritas, says while debt relief might be a help, taxpayers expect projects to provide direct measures for the poor.
"Programs such as the Pacific solution are not ones that the Australian public would understand to be about the direct alleviation of poverty for the people of Nauru or PNG," Mr de Groot said.
The Pacific Solution was introduced in 2001 when the Australian Government refused to allow asylum seekers into the country and asked countries in the Pacific to receive them instead.