The PM offers an analogy to help explain the cuts that will need to be made in the upcoming budget.

PRIME Minister Julia Gillard has declared that decisions about the nation's finances are so "grave" and "urgent" every option is on the table at the Budget - even those previously off the table.

Confirming newspaper reports today, Ms Gillard told a forum in Canberra the government’s revenue had slid $12 billion since the last budget update in October.



But the PM went further, saying that "everyone" had to cover their share of the burden although she insisted would not “cut to the bone".



"As a Labor Prime Minister, I find these decisions both urgent and grave,” Ms Gillard said.



"This revenue discussion is not historical, it's very contemporary. There is new news here compared to six months ago - and new news here compared even to three months ago.



"Therefore, I have expressly determined we need to have every reasonable option on the table to meet the needs of the times, even options previously taken off the table."

Ms Gillard said today the May budget will be more about the economic challenges facing the nation, rather than the upcoming federal election.



She said the key challenge was to respond to huge reductions in revenue growth over the next four years, with the amount of tax revenue collected for 2012/13 now expected to decline by $12 billion.



"Tuesday 14 May will be no old-fashioned pre-election budget night," the prime minister said.



"What the treasurer will deliver will not be a political pamphlet - he will outline an economic program.



"The budget will outline the fiscal path for the coming four years, one designed both to take account of the nation's current circumstances and to shape the nation's future."



Ms Gillard said the main goals were to maximise jobs and economic growth, properly fund services over the long-term, invest in ways to strengthen the economy, keep inflation in check and give the Reserve Bank of Australia maximum opportunity to keep interest rates low.



But Ms Gillard said Labor was committed to its medium-term strategy to deliver budget surpluses on average over the course of the economy cycle.



She said domestic economy was stable and resilient.



"Our economic fundamentals are sound," Ms Gillard said.



"We have contained inflation, low interest rates, low public debt."



Australia's prospects looked bright, given the global economic shift toward Asia.



"However - and this is key - while Australia is stable, resilient and close to centres of growth, the wider world economy is quite a different story," she said.



"There is serious, persistent weakness in global growth - and continued volatility in the global economy."

But while the strong Australia dollar showed the nation was a great investment, it came at a price.



"The persistent high dollar, as well as squeezing exporting jobs, also squeezes the profits of exporting firms - with lower profits for these companies comes lower company tax going to government," Ms Gillard said.



"We can't assume this will change soon."



Australia was creating more jobs, exporting more goods and services and buying and selling more from each other, but prices were growing at a slower rate and affecting gross domestic product growth in nominal terms.



"We expect nominal GDP growth for future years to be revised down," Ms Gillard said.



"For the budget bottom line, it's a very meaningful fact - because, naturally enough, companies don't pay tax on volume, they pay tax on value, which is driven by price."

Ms Gillard warned against "economic simpletons" who argue revenue in 2013/14 would be more than this financial year.



This did not take into account a larger population and rising health and aged pension costs which will be far higher than the growth in tax money.



"It's clear that the extraordinary revenue peaks of the mid-2000s won't be repeated," she added.



In the future, new spending in the budget must be matched with savings.



"I trust that all would acknowledge the government has some serious decisions to make and announce in the coming two weeks," Ms Gillard said.



She said Labor's education reforms and disability care programs must not be jeopardised.



"But - because we now are confronted with new facts and far more significant reductions in tax money than was expected - we are going through the process now of making decisions to spend less in some areas than we had hoped, to raise more in revenue in some areas than we had planned," she said.



"The nation and the government must have maximum flexibility to deal with these complex - and rapidly changing - events," she said.

Under questioning, Ms Gillard said she didn’t want to play a rule in, rule out game ahead of the budget - but then ruled out changes to the GST.



With just three weeks until Treasurer Wayne Swan hands down his most politically important Budget - and 20 weeks until election day - Ms Gillard announced that fresh Treasury advice shows a "significant fiscal gap".

The new hole in revenue is almost double the surprise $7.5 billion shortfall that caused Labor to abandon just before Christmas its three-year pledge to have a $1.1 billion surplus.

It sets the scene for a bigger than expected deficit when Mr Swan hands down his sixth Budget on May 14.

It will also make it tougher to pay for multi-billion dollar spending plans for schools and the national disability insurance scheme, which the PM has guaranteed will be in the Budget.

But the PM asked voters to trust her government to make the right choices and vow not to "fail the future".

The Treasurer has never delivered a surplus despite the repeated promise "come hell or high water" to have one before the election.

In a speech to the Per Capita think-tank in Canberra today, Ms Gillard said the Budget trouble is not because of too much spending.

"This unusually low revenue, which wasn't forecast even a few months ago, creates a significant fiscal gap over the Budget period," she will say.

"Put simply, spending is controlled but the amount of tax money coming to the Government is growing much slower than expected."

The Opposition, which has also dumped its promise of a surplus, has been attacking Labor over spending which it says is now $100 billion a year higher than when Labor came to power in 2007.

Opposition Leader Tony Abbott has warned there would be some "hurt" to repair the nation's finances, blaming Labor, which has not had a surplus since 1989.

When asked about the appropriateness of Coalition MP Steve Ciobo's claim today that Julia Gillard was "like an alcoholic" with spending taxpayer funds, Mr Abbott said: "Look it was colourful language, which I wouldn't probably use myself, but I think everyone knows this government spends money like a drunken sailor."



"You will never see fiscal responsibility from this government," he added.

Shadow Treasurer Joe Hockey said he was not surprised by the latest figures.



"The Government says it's not collecting enough money but it's absolutely determined to continue with big spending initiatives," Mr Hockey told ABC radio today.



"As every day passes we're getting a new number from the government."



He said coalition policies were subject to "constant review" in light of the difficult financial circumstances it potentially may inherit after the next election.

Former Federal Treasurer Peter Costello has warned future generations will pay for the irresponsible spending of the Gillard Government.



Heading into Parliament House in Brisbane to sell his 1000-page fix for the Queensland economy to MPs, Mr Costello said the federal budget would be in a "far better position if the government hadn't spent money it didn't have".



"You might think to yourself if they saw their taxes were failing like their mining taxes, that they'd actually pull back their expenditure but they went and spent money they didn't have," said Mr Costello who delivered 12 federal budgets including ten surpluses.



"Now they're finding they're in a budget deficit. Who gets to pay for these budget deficits? Future generations.



"That's all it's about now - Labor passing on the debt to future generations."



The new Treasury advice is believed to show the biggest hit has been to company tax receipts. Ms Gillard says the high dollar and continued effects from the global economic crisis are still hurting business.

"The prices for what Australian companies sell overseas are lower, imports are cheaper, local competition is fierce. Those things add up to business making less profit than planned," she will say.

"When businesses make less profit than planned, it also means government gets less money in tax than expected."

But the PM has rejected calls for the Government to slash and burn, saying it is more important to have a Budget that protects jobs and economic growth and invests for a fairer future.

"We won't, during this time of reduced revenue, fail the future by not making the wise investments that will make us a stronger and smarter nation," she says.

"What is more, these necessary investments are affordable if we make smart decisions."

The PM will seek to use the speech to cast the Budget as a choice for voters, claiming the Coalition would be too brutal.

"Our opponents and their friends crudely flaunt the bitter language of the cut throat and the brandished axe," she says.

"We govern for all Australians, we govern to strengthen the economy and to spread the benefits to all."

Despite repeatedly promising a surplus, before dumping the pledge last year, Mr Swan has now hit out at calls for a surplus as "mindless austerity".

Mr Swan said despite the pressure on the Budget "we will never cut to the bone, putting jobs and growth at risk by taking an axe to the economy".

He said 900,000 jobs had been created since Labor came to power in 2007 while 28 million jobs had been lost worldwide over the same period.

''We can proudly point to an economy that is 13 per cent larger than at the end of 2007 while half of all advanced countries are yet to get back to the starting line.''