My kids are a little older now (dd is 11) so in the past she's asked for big-ticket items like laptops, iPod Touch, etc. We just tell her that we don't spend that much on holiday/birthday gifts. I'm not big on using negative language like "we can't afford it." We usually just say "Our budget allows for X amount." or "We choose to spend our money in a different way." (the last phrase works well when comparing to other kids who may get more expensive gifts.
Then, we tell her that if she wants, she can request money as a gift. That way, she can save up her money to buy what she wants when she's saved enough.
