LEIGH SALES, PRESENTER: The Treasurer, Joe Hockey, says "all options are on the table" to bring the nation's spending back to acceptable levels.

The Abbott Government has released its first major budget statement in office: the Mid-year Economic and Fiscal Outlook. It reveals the deficit for this year has blown out to nearly $50 billion.

The Treasurer is warning that Australians will have to rethink what they're used to receiving from Government.

And as chief political correspondent Sabra Lane reports, the budget forecasts also warn that not only is spending unsustainable, revenues are collapsing as the economy softens.

(music: 'Money' by Pink Floyd)

JOE HOCKEY, TREASURER: This is the budget that Labor should have delivered. This is what it really is about: the truth.

TONY BURKE, OPP. FINANCE SPOKESMAN: You can't get away with just denying reality.

TONY ABBOTT, PRIME MINISTER: And what we will see today is the sad truth.

BILL SHORTEN, OPPOSITION LEADER: They've got to stop blaming everyone else. The buck stops with them.

SABRA LANE, REPORTER: It's a document full of big budget deficits and grim warnings if Government spending continues unchanged. The antidote will be delivered in May, in Joe Hockey's first budget.

The Government is promising to take hard decisions to live within its means.

JOE HOCKEY: This document gives us an accurate picture of what we have now and what lies ahead.

SABRA LANE: The budget update predicts the deficit for the current financial year will blow out to $47 billion, up from the $30 billion predicted before the election.

Deficits continue for the four-year budget cycle, dipping to $34 billion in the next financial year and improving to $17.7 billion in the outer years. All up: deficits totalling more than $120 billion. If Government spending remained unchanged, debt within a decade could reach $667 billion.

The reason for the deterioration: a softening in the economic outlook, a further reduction in tax receipts of more than $37 billion and, as the Treasury document puts it, "Unresolved issues inherited from the former government."

CHRIS RICHARDSON, DELOITTE ACCESS ECONOMICS: Everybody's arguing about policy but policy is not the numbers driving today's update. That's all about the economy. Almost all of the big downgrades in the budget have to do with the economy.

What's happening right now: weak wages growth is hurting the tax take. You know, we tax wages, obviously, and that's not as lucrative as the Government had earlier expected. And coal and iron ore prices: they're going to be down further than earlier projected. Those things hurt.

JOHN DALEY, CEO, GRATTAN INSTITUTE: Yes, you can afford to do big things but you have to find ways of paying for them. And the problem that we've got as a country is that we've been living about two per cent of GDP - that's $30 billion in today's terms - beyond our means for six or seven years. And we can't do that.

SABRA LANE: The economy's expected to grow at a slower rate: 2.5 per cent for this financial year and next, returning to trend growth of three per cent in the final two years of the outlook.

Unemployment is expected to rise to 6.25 per cent and will stay there. Inflation will remain within the Reserve Bank of Australia's target band and wages growth is expected to remain well below trend at 2.75 per cent for this financial year.

JOE HOCKEY: The implications of this are clear: the current budget outlook is not sustainable. Doing nothing is not an option for Australia.

TONY BURKE: In 101 days they have added $167 million a day to Australia's deficit. The same people who spent years railing against debt and deficit and claiming that they would be able to turn it around from day one.

SABRA LANE: The Government and Opposition are continuing to play the blame game of who should shoulder the responsibility for the columns of red ink through the document.

What should concern all of us are the warnings contained within the update about future spending forecasts. It predicts significant pressures on the budget linked to the National Disability Insurance Scheme, the schools package and overseas aid. It also says living within our means requires the elimination of waste but will also require people to adjust to reductions in some spending to which they've become accustomed.

JOHN DALEY: Given where we're starting from, it's not looking promising unless we make even harder decisions. So far, we've been talking about essentially where the Commonwealth budget is at the moment. As you say, with those decisions they will add probably about another one per cent of GDP to the budget costs and that will make life even more difficult. So can we afford them at the moment? Clearly not.

JOE HOCKEY: All options are on the table.

CHRIS BOWEN, SHADOW TREASURER: Joe Hockey is softening up the Australian people. He's preparing the ground for deep and brutal cuts come budget time: cuts to come which will affect every Australian.

SABRA LANE: In the meantime, the finger pointing continues over who's responsible.

CHRIS RICHARDSON: They are both right. They are both to blame for this and the blame stretches back for a decade.

SABRA LANE: Economist Chris Richardson is a partner in Deloitte Access Economics.

CHRIS RICHARDSON: Today marks the day where we finally said, "The dollars from the China boom, the boost to the budget - not from anything any politician did but from the strong economy in China: that's finally unwound back to nothing. Problem is: that temporary windfall was spent as permanent promises by politicians of every single stripe in Australia.

There's a lot of blame. That's not the point. The real point is: what do we do now?

SABRA LANE: What about the budget fix here? The Government does say that it's prepared to make the hard decisions to bring the budget back to surplus. If the Treasurer's serious about that statement, what does this Government have to do?

CHRIS RICHARDSON: The same that's been true for some years now and that neither side of politics has had the real courage to sign up to.

There are three big buckets that we could improve in the Australian budget. One is industry welfare. You know, we hand a lot of money to companies, not for any good reason but mostly to do with marginal electorates. Number 2: a whole bunch of middle-class welfare. Again, that grew very rapidly for a while and needs to be wound back. Number 3: there's still a bunch of top-end tax breaks that are unsustainable and not helping us.

That's what we need to do. Politics is what's going to make it hard to do.

SABRA LANE: The Gratton Institute's John Daley suggests a controversial cut but, given it's considered political dynamite, it's unlikely either major party would adopt it.

JOHN DALEY: The aged pension is a good place to be looking. At the moment it's not particularly well targeted.

Some of it goes to people who really, really need it. Some of it goes to people who are actually doing quite well. And that's because the way that we calculate the means test and wealth test for the aged pension means that a very large number of people who are quite well off nevertheless qualify for a part pension.

LEIGH SALES: Sabra Lane reporting.