State Governments have primary responsibility for running and funding public hospitals and schools. The extent of existing Commonwealth funding to public hospitals and schools blurs these accountabilities and is unaffordable.
Thus, more than $80 billion in Commonwealth commitments to the state governments for schools and hospitals are being abandoned.
Of course, this is in part sheer opportunism. It helps the budget bottom line for health and education costs to be more borne by the states.
The policy shift would be more coherent if it came after the release of the forthcoming white paper into federalism.
Nevertheless, those caveats aside, the budget represents a new stage in the relationship between the Commonwealth and the states, whose responsibility the national government has usurped.
Kevin Rudd once spoke of the "deep structure, folklore and mysticism of Commonwealth-state relations". Central to that mysticism has been one article of faith: that with Commonwealth money comes Commonwealth power.
Hence the complex web of grants and regulatory agencies that govern Commonwealth-state relations and use money as a tool for policy control.
Now that the money is being pared back, the states should take the opportunity to reject Canberra diktats as well.
For instance - wouldn't this be a good opportunity to abandon the Gillard government's national curriculum?
One of the most common claims in Australian politics is that federalism is dysfunctional. Indeed, that was one of the themes of Battlelines: a century of Commonwealth policy imperialism has left us with overlapping responsibilities, unclear areas of accountability, and widespread voter confusion about what level of government does what.
But in truth the system is only as dysfunctional as any other political system that requires constant negotiation and compromises.
Where the true dysfunction lies is in the politics of federalism, not the structure of federalism itself.
Federalism is constantly the subject of reformist impulse, constantly the subject of complaint, and in a constant state of mutability. Collectively, Australian politicians do not have a clear idea of what they want the federation to look like.
This is not a run-of-the-mill political disagreement. It's something more fundamental to our political class. They don't quite know how to handle the fact that political power is divided between two levels of government.
Australian federalism is confused and unstable because the political class is confused and uncertain about federalism.
The easiest political position to hold has always been centralisation - clear away all that confusion by handing everything to Canberra.
John Howard was an unashamed centraliser. Particularly during the last years of his government, Howard made it clear he had no truck with "states' rights".
But federalism was once a core Liberal Party belief. Robert Menzies wrote in his book Central Power in the Australian Commonwealth that "in the division of power, in the demarcation of powers between a Central Government and the State governments ... resides one of the true protections of individual freedom".
The end result of Howard's centralism was WorkChoices - a federal takeover of industrial relations.
Rudd proposed "collaborative federalism". This model was supposed to forge a new relationship between Commonwealth and states that was based less in hostility and more in harmony.
But Rudd's kumbaya utopianism was paired with by his technocratic desire for Canberra control. One proposal to end the "blame game" was an outright federal takeover of health - a takeover brought about, if necessary, by a referendum.
In 2009 Rudd even suggested the Commonwealth take over urban planning. It is hard to imagine a less "national" policy area than city design.
Now Abbott - the passionate centraliser, student of Howard - is trying to strengthen the traditional division of powers. No wonder Australian voters are confused about which level of government is responsible for what.
In a crisis meeting in Sydney over the weekend, the state premiers said they hoped to enlist federal senators to their side for the budget contest.
Technically, you see, senators are supposed to represent the states. That's how our political system was designed.
But in practice they do no such thing. The Senate is just a slightly more patrician group of the usual party politicians. The idea that senators would go against their party interest in favour of the interests of the states they represent is laughable.
The premiers' suggestion underlines just how disorientated they are by Abbott's federalist revival.
As, indeed, all Australian politicians are about the purpose of Australia's federal system.