The most likely response to the growing financial pressures confronting the States will be a steady increase in tied Commonwealth assistance. Indeed, the forward estimates in the 2008–09 Federal Budget forecast SPPs (Special Purpose payments) to increase from $32.2 billion (2007–08) to $36.9 billion in 2011–12 (Commonwealth of Australia 2008b). In the crucial issue of health funding, the Rudd Government’s four-year National Health and Hospitals Reform Plan will increase public-hospital funding by $2 billion (subsequently increased to $3 billion over five years in May 2008) so long as the States meet a range of specific reform targets (ALP 2007). While the initiative will help address the current shortfall being experienced by the States, the funding is unlikely to meet the increasing costs associated with running the hospital system unless massive efficiency savings can be achieved (Wells 2007; House of Representatives 2006).

In many ways, the National Health and Hospitals Reform Plan and the associated National Health and Hospitals Reform Commission are a template for the Rudd Government’s new federalism agenda, which aims to create a culture of intense collaboration between the Commonwealth and State Labor governments (Kelly 2007).^[6] It appears that the recently elected Labor Government is genuinely committed to grant the States the independence to choose the means by which they improve service delivery. However, the Commonwealth seems much less willing to negotiate when it comes to establishing the goals of intergovernmental reforms. For example, in the Hospital Reform Plan it is quite clear that if the States fail to achieve agreed targets then the Commonwealth will give consideration to a federal takeover of public hospitals (ALP 2007). Similarly, in education, the Rudd Government is taking an uncompromising position in promoting a national curriculum and uniform learning benchmarks despite the likelihood that this approach will result in conflict with State Labor governments. While the Rudd Government may have the skill and commitment to negotiate significant intergovernmental reforms, history indicates that there are real limits to partisan loyalties and it is likely there will be serious political conflicts between State Labor Premiers and the Federal Labor Government (Hamill 2006: 172–3). Or, as Greg Craven (2008) commented recently, ‘COAG necessarily is a creature of stitches and patches. If we are going to approach some of the big issues of federalism, some heavy constitutional weaving will be required.’

Ultimately, cooperative federalism can only work when the States and the Commonwealth have shared interests. When these interests differ, the nature of the VFI in the Australian federation and the system of tied funding which it yields will inevitably result in cost shifting, accountability problems and intergovernmental conflict. Given these structural problems with Australian federalism, more fundamental reforms may be necessary.