The Prime Minister says tough political decisions contributed to Labor's election-loss in Gippsland, but the Opposition says the Government's just out of touch with voters.
The Gippsland by-election saw voters turn their backs on the government, delivering a major win for the opposition.
The Nationals candidate Darren Chester triumphed with a swing of more than seven per cent in a contest which has given Labor its first major reality check since taking office.
Kevin Rudd says when a government makes tough decisions, the community does not always agree.
"The Government was elected to make tough decisions for the long-term future. Tough decisions to keep downward pressure on inflation, downward pressure on interest rates.
"It means that there'll be political setbacks. That's simply the truth of it."
The Opposition sees it differently, with Brendan Nelson saying the Prime Minister has made no decisions, and that is the problem.
"Mr Rudd is all backswing and no follow-through, the people of Gippsland have woken up to this.
"And what it really means now for Mr Rudd is he's got to start running around the country approaching a whole range of issues without focus without priority and start to focus on the real things that are worrying real Australians."
Labor Party national president Mike Rann has downplayed the result of yesterday's Gippsland by-election, saying no serious commentator believed the government would win the seat.
"Labor has never held this seat," Mr Rann told Sky News.
"It's always been held by the Nationals. Labor never believed, and neither did any serious commentator, that we would win this election."
Some political analysts had cast the by-election as a test of federal Opposition Leader Brendan Nelson's leadership.
Mr Rann said if that was true then Dr Nelson had failed.
"If Brendan Nelson thinks it's an endorsement of his leadership ... he spent a fortune on this campaign, five times more than Labor on this campaign, and he came third.
"They wouldn't even put Brendan Nelson's picture on the how to vote cards."
Mr Rann admitted there was a message for Prime Minister Kevin Rudd in the result.
"The message is that you've got to keep governing for the long term - which is exactly what Kevin Rudd is doing."