Massimiliano Allegri's side have won just three league games this season and sit 11th in Serie A following a 2-0 defeat to Fiorentina on Saturday.
Gattuso, who spent 13 years at San Siro before managerial stints at Sion and Palermo, claims the club have been held back by financial limitations.
"You have to spend a lot of money to build strong sides," he told Che Tempo Che Fa.
"This is a moment in time where little investment is being made, the opposite from what president Silvio Berlusconi has done throughout his reign."
Furthermore, Gattuso claims that leaders Roma, holders Juventus and in-form Napoli have all pulled away from Milan in terms of quality.
"Today, Roma, Napoli and Juventus have something more than Milan because they have spent a lot on new players," he added.
Milan's next match sees them face Spanish champions Barcelona at Camp Nou in Group H of the UEFA Champions League on Wednesday.
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