We are in a similar situation, although with only 2 boys, 16 and 12. I think it's important to talk to the kids on their level, rather than one big conversation with all of them. The 5 year old is probably the easiest to make changes with, the older ones get used to a certain level of consumption and it's harder to cut back. Wants vs. needs is a big topic of conversation around here, and it takes a lot of repetition for it to sink in. I think that setting up an honest budget for the kids' expenses and sharing it with them is helpful. If they know that they have $200/year to spend on activities, they may make different choices than if they think the money is unlimited. They may also get into bargain hunting for things like clothes if they know the total dollar amount they have to spend.
Once they're all on board that there are going to be changes, then maybe a monthly family meeting to go over the kids' budget might be helpful. I personally don't think they need to know your total budget or how far in debt you are, just how it pertains to them and their spending. I'm also big on charts and visuals, so I might make a big poster with both monthly and yearly budgets for the kids activities and let them see where they are in the spending. That way when they ask for another activity you can refer back to the visual and let them figure out if what they want fits into the budget.
As hard as it is, you should teach them to be realistic about the cost of their activities. As an example from my life, signing up for soccer isn't just the cost of registration, it's the cleats and the uniform and the trophies and the pizza party at the end of the season (not to mention the time driving and going to practice and games
I don't have any great ideas for the Christmas thing. There is an older book, Unplug the Christmas Machine
, that you can probably get at the library that may help. We've always had relatively modest holidays and it helps that we don't celebrate Christmas so the hoopla surrounding it isn't as strong. Often the kids have one thing they really, really want and if its out of our budget we'll try and figure out a group way of financing it (between us and grandparents we can usually make it happen). My kids have also (miraculously) learned to save up their allowances and gift money and have purchased for themselves a lot of things that we won't buy out of principle (the xbox360 for example).
Good luck and thanks for raising an important issue.