SALEM, Ore. -- Oregon's budget gap widened by some half a billion dollars in the last two months, according to the latest revenue forecast from state economists.

May budget numbers indicate a deficit of more than $3.5 billion between revenue and costs that lawmakers must now work to close.

The number, though not welcome, was better than what lawmakers had predicted. Legislative leaders had expected revenue to decline by $1 billion or more.

 Details: Oregon Revenue Forecast summary (PDF)

 More: Gov. statements

Tom Potiowsky, the state economist, predicted a $350 million hole in the current budget period, which wraps up in June. That number was worse than expected. Lawmakers had already cut $855 million to balance the current budget.

However, Potiowsky offered a more hopeful picture than he did in March. He said there are signs Oregon's economy was beginning to turn around.

Gov. Ted Kulongoski planned a speech Friday on the economy, a few hours after the latest budget numbers were released.

Kulongoski spoke to the City Club in Portland at noon, addressing the revenue shortfalls, as well as giving an overview of the state's economy and talk about the state's efforts in job retention and creation.

Also: GOP budget does not raise taxes

He called this year's budget "the most challenging Oregon has faced in many years ... This recession will not be over anywhere in oregon until it is over everywhere in Oregon," he said.

Kulongoski emphasized that although there was a "jobs emergency" with thousands of positions lost, Oregonians would be able to bounce back through new "green technologies" and the traditional manufacturing and natural resource industries that remain.

"We have not lost control ... we will get through this."

Kulongoski wants Oregon to spend at least $90 million for what he calls an emergency summer jobs program he says will create 12,000 jobs paying $8.40 to $10 an hour.

He says the jobs would be at local food banks, parks and forests, among other places.

In a statement, Kulongoski said Friday that he will ask the Legislature to cap the state's unemployment insurance trust fund to pay for the work and compared the program to President Franklin Roosevelt's Depression-era Civilian Conservation Corps.

Senate republican leader Sen. Ted Ferrioli saw it differently.

"Sweeping $90 million out for any purpose not related to unemployment benefits seems to me like a defacto tax increase on businesses. And that's the last thing we need to do ... raise taxes on small businesses."

Lawmakers have long said they'd use a combination of new taxes, cuts and stimulus funds to make up for a steep loss in revenue.

Oregonians could expect far more of the budget balancing to be done through cuts, not tax hikes, lawmakers said at a press conference.

Still, they said big businesses could expect to pay a higher corporate minimum tax, which was set at $10 in 1931 and hasn't been changed since.

House republican leader Rep. Bruce Hannah disagreed with the tax plan.

"When you propose $500 million in new taxes on Oregonians and you spend $250 million of that giving pay raises to state employees  and you say 'yeah we're gonna increase your tax bill to $500 million' -- half to give state employees a pay raise? That's part of their problem."

(KGW Reporter Pat Dooris and Associated Press contributed to this report)