Prime Minister Kevin Rudd says he will not bow to pressure from states to provide billions of dollars in extra funding.
A report today says the states will demand $23 billion of extra funding before they sign up to new deals at the next COAG meeting in November.
Mr Rudd has described the report as one of the "larger try-ons of the century".
"We're engaged in a long negotiation with the states over the future of hospitals funding and on schools funding," he said.
"We're going to sort that out in the middle of November.
"I'm sure there will be a lot of argy bargy in the between time but what was that great line in The Castle? You've got to be dreaming."
The Federal Government has been pushing the states for federal reform in several areas and has threatened the states with a takeover of the hospital system if a national reform plan is not agreed to by mid 2009.
Around $33 billion is now allocated to the states each year from the Federal Government.
Budget worse than expected - Rees NEW South Wales Premier Nathan Rees says the economic outlook for the state is more bleak than he expected, and difficult decisions will have to be made.