"And of course the impact won't just be in this financial year, it will also be across the forward estimates." The Grattan Institute says that while notionally on track to surplus at the moment, the combined total of state and Commonwealth budget deficits could reach 4 per cent of gross domestic product by 2023, which is about $60 billion in today's dollars and would be about $100 billion in 10 years' time. "Initiatives such as the national disability insurance scheme, the education reforms, direct action on climate change and parental leave are only a small part of it," Grattan Institute chief executive John Daley said. "The big driver, costing $30 billion, is extra spending on health. Contrary to popular belief, the extra spending isn't being driven by ageing. It's that compared to 10 years ago today's 60-year-olds see the doctor more often, have more tests, face more operations and take more drugs. We are getting something out of the extra spending: more people are staying alive. But the question is - who is going to pay for it?" Health Minister Tanya Plibersek said on Monday that investment in health was an area where demand would continue to increase.

''We also want to continue to offer the very best treatments to people,'' she told reporters in Sydney. Finance Minister Penny Wong said the federal government would not be cutting the budget ''to the bone'' to make up for declining revenues. She said the government would still be putting jobs and growth first and make responsible savings to support policy plans. ''You don't deal with it by cutting to the bone,'' Senator Wong said. Senator Wong said the government had a very strong record in terms of structural budget savings, many of which had been opposed by the Coalition.

''We are privileged in Australia to be in a much better position than many of the other advanced economies that are struggling with the same question,'' she said. ''What you don't do is to cut so hard you stall the economy and risk jobs. What you have to do is make the right savings decisions.'' Assistant Treasurer David Bradbury insisted on Monday that important measures had been taken to ensure federal government finances were sustainable in the long term. But he declined to reveal specific figures that might be in the May 14 budget. Responding to the analysis, Mr Bradbury said savings measures the government had put in place during the past five years have had a long-term structural impact on the budget.

''That means by 2020, if we had not taken these important measures, the budget position would be some $250 billion worse off,'' he told reporters in Sydney. ''That's why taking difficult positions is something we have been prepared to do to make sure the budget is sustainable into the long term.'' The institute also believes welfare spending will have to climb because the present Newstart unemployment allowance is unsustainably low. It says company tax revenue, mining and carbon tax revenue and general tax takings will slide as a proportion of the economy as the price of exports slips. "The problem is the attractive solutions won't buy that much money," Mr Daley said. "Cutting middle-class welfare won't be enough … ''Even if you axed the baby bonus, the Schoolkids Bonus and parts of family tax benefit B that go to high earners you'd only make $4 billion.

"Eliminating government waste won't help much either. Axing the Commonwealth departments of Education and Health might save the wages of 5000 public servants, but that's only around half a billion.'' The Grattan Institute says the gap can only be closed by higher taxes, meaning that the days of "painless" budget fixes are over. "The places to look are company tax and company tax concessions, income tax and goods and services tax,'' Mr Daley said. ''The old idea you can introduce a change with no losers, at least none earning less than $100,000, won't work. Everyone will have to share the pain.'' A spokesman for Mr Swan rejected the notion the Treasurer would not make hard decisions, saying Labor's new spending on schools was funded by cutbacks elsewhere. It had tackled health spending by means testing the private health insurance rebate and "cutting the millionaires' dental scheme". Mr Swan told the ABC he was not going to make up for a shortfall in May's budget by "savage cuts". "That would not support jobs and growth …'' he said.

Meanwhile, shadow treasurer Joe Hocket said on Monday that the Coalition could not commit to returning the federal budget to surplus in its first term because it can't rely on the government's figures. Mr Hockey said the only credible numbers he would count on would be from the departments of treasury and finance in the first week of the election campaign. But for now, he said the coalition could not make firm promises about a budget surplus, despite promising in January that a surplus would be achieved in the first year of a Liberal-led government and every year after that. ''We can only go on the information that's available,'' Mr Hockey said. ''And everyone's saying 'c'mon Joe, c'mon Tony, tell us what the numbers are going to be in four years time'. I don't know what the numbers are now. ''I'm not so much of a mug to put in a blind offer and have the vendor lie about the books for the past five years.''

Mr Hockey will meet West Australian Premier Colin Barnett later on Monday and denied a secret GST deal was afoot. Liberal frontbencher Mitch Fifield said the government was simply spending more than it was gaining in revenue. ''Wayne Swan wants us to think he's just a hapless victim of circumstances beyond his control,'' he told Sky News on Monday. Australian Greens leader Christine Milne said to avoid a revenue crisis, Labor needed to fix the mining tax and scrap subsidies to the fossil-fuel industry. ''Clearly, Labor does not have the courage to take on the big mining companies, particularly in an election year,'' she said.