Joe Hockey has abandoned the federal government's commitment to achieve a budget surplus by 2016/17 arguing it would never have been achieved because spending was racing out of control.

Instead the Treasurer has revealed a bleak economic outlook for the economy on the eve of the Christmas period, projecting $123 billion worth of deficits over the next four years.

Releasing the Mid-Year Economic and Fiscal Outlook report – a snapshot of the economic picture at the half-way point of the financial year - Mr Hockey revealed a revenue collapse of $16.8 billion for the year contributing to a deficit in June 2014 expected to reach $47 billion.

Driving the deterioration is a combination of factors from a softer economy, with lower domestic prices and wages, and "significantly lower nominal GDP" driving "a reduction in tax receipts by more than $37 billion over the forward estimates".

The "forward estimates" is government-speak for the next four years.

The Treasury forecasts also reveal escalating debt which if left on its current path would see gross debt reach $667 billion by 2023/24 – or about 26 per cent of GDP.

Over the current four-year budget period, gross debt is expected to hit $460 billion in 2016-17 – a larger number than previously known and the reason behind Mr Hockey's desperation to have the debt ceiling increased to $500 billion before he reached agreement with the Greens to abolish the upper limit altogether.

This is all taking place as Australian economic activity begins to shift away from ramped-up mining investment towards non-mining parts of the economy.

The key driver of economic growth in recent years has been resources investment, which has more than quadrupled as a share of GDP over the past decade.

But from 2014-15, resources investment is expected to start "sharply detracting" from growth, with the forecast decline in resources investment now steeper than it was at the 2013 PEFO.

Speaking at the National Press Club in Canberra in Tuesday, Mr Hockey compared his budget task with the time he climbed Mount Kilimanjaro.

"Today, the government is being honest about the fiscal and economic challenge before us," he said.

"Australia is now preparing to climb a challenging fiscal and economic mountain."

When asked when the Coalition would deliver a surplus, Mr Hockey replied: "We want to get back to surplus as soon as we can. I'm not going to make the mistake [former treasurer] Wayne Swan made."

The former Labor government had promised to return the budget to surplus in 2012-13 but was forced to dump that commitment. In his final budget in May this year, Mr Swan went on to commit Labor to achieve a modest surplus in 2016-17.

The Coalition had said it would match or better that commitment.

Mr Hockey said on Tuesday no challenge was insurmountable but argued that, unless the government took "immediate" action, Australia would be in debt for more than a decade.

Australians would have to adjust their expectations about what the government could provide, he said.

"Much of the projected growth in spending is from social programs including welfare, education and health. Spending reform will inevitably required difficult choices about the policies that Australians need now and in the years to come," he said.

Mr Hockey said that Australia had to do everything it could to promote new mining investment.

"It is essential that we get rid of the carbon and mining taxes, which are impediments to new mining investment."

'Spending cuts necessary': Bowen

The Treasurer added that the government would fix the budget but would need the entire community to be involved.

"Doing nothing is not an option for Australia," Mr Hockey said.

The Treasurer said that spending cuts rather than taxes would be required over the coming years.

''No country has ever taxed itself to prosperity,'' he said.

During questions, Finance Minister Mathias Cormann restated the government's commitment to deliver the National Disability Insurance Scheme but said it would need to be delivered in the most cost-effective way possible.

He said the federal government was talking to the states and territories about how "the efficiency and cost-effectiveness of this very important commitment can be maximised".

Last week after the COAG meeting, Prime Minister Tony Abbott said that support to people with disabilities needed to be provided on a "sustainable" basis.

Mr Hockey said that the mid-year report included the "full impact" of the Coalition's election commitments with one exception.

''We have not included the cost savings arising from our election policy to reduce the public service headcount by 12,000 over two years,'' he said in relation to the government's shelved public service plans.

The Treasurer said that ''given the previous government cut over 14,000 public service jobs without an announcement, our proposal will be reviewed in light of the findings of the National Commission of Audit''.

Mr Hockey said that the Coalition was "angry" that attempts to repair the budget had already been opposed by the Labor Party.

This includes Labor's opposition to the repeal of the mining tax. While the mining tax continues, the government needs to pay the next round of the Schoolkids Bonus in January, to the tune of $730 million.

"I want to draw a line in the sand on the numbers that we have inherited [from Labor]," Mr Hockey said.

He said that the May budget would put in place a "program to grow the economy, deal with the deficit and debt and put in place a sustainable fiscal strategy for the long haul".

Mr Hockey told the Press Club that the Coalition had known throughout its last few years in opposition that the task upon assuming government would be "substantial".

"It gives me no pleasure to know we were right."

Mr Hockey said that the new Coalition government had provided $8.8 billion to the Reserve Bank after governor Glenn Stevens said that the bank needed more funds.

"I'm very glad that we've done it," he said.

The Treasurer also had a message to Labor leader Bill Shorten.

"I say directly to Bill Shorten today, now is the time to apologise to the Australian people for what you have left behind."

'Magic pudding economics': Labor

On Tuesday, Shadow Treasurer Chris Bowen said that Mr Hockey was in breach of his contract with voters.

"Today's the day Joe Hockey's magic pudding economics came crashing down around his ears," he told reporters in Sydney.

Mr Bowen said the Treasurer was softening up Australians for deep and brutal cuts in May.

"This is Mr Hockey's attempt at an alibi."

Mr Swan also waded into the MYEFO debate.

"Hockey trying to create a sense of crisis to justify austerity policies. Threat to confidence & jobs over Christmas #MYEFO," he posted on Twitter.

The Business Council of Australia described Tuesday's budget update as a ‘‘wake up call’’ to the federal Parliament.

''MYEFO shows Australia faces a decade of deficits if the federal government does not begin to correct the excessive spending that has left the fiscal position weaker than it should be and exposed to future global economic volatility,'' chief executive Jennifer Westacott said in a statement.

''There must be a re-prioritisation of expenditure and all sides of politics must be honest with the Australian community about the cost of government programs and what is likely to be affordable within current tax settings.''

In response to MYEFO, Greens leader Christine Milne said that now was not the time to talk about spending restraint and abolishing the carbon and mining taxes. "What Australia now needs is to get over the blame game and instead talk about how we are going to raise money for the future," she said.