I love Katdawg’s idea of organizing the purchase of the guitar, rather than shouldering the entire cost yourself. If you take up a collection from family and friends and suggest that they donate a certain amount towards the guitar, you could possibly get him the guitar he wants and stay within your budget!
However, if you want to give him something that’s just from you, that is entirely understandable. What I would suggest is telling him before his birthday that you wish you could buy him what he wants, but you just can’t swing it this year. That way you’ll avoid awkward moments when he opens whatever it is you do give him, and it’s not what he was expecting. It’ll be a lot easier on both of you if you acknowledge upfront his desire for you to buy him a guitar, and your inability to buy it for him.
I know it’s hard to disappoint someone you love, but being realistic and honest with those you love, is important in establishing and developing intimacy. Figure out what your budget is, and buy him something that you feel you can afford and that you know will be special for him. 🙂