Finance minister Nick Minchin made a revealing comment on budget night when he told Lateline‘s Ali Moore that education is “one of the Federal Government’s most fundamental responsibilities, particularly higher education”. Moore evidently didn’t think to respond with “But that’s not what The Constitution says, is it?”

Constitutionally, the federal government has no responsibility at all for education. But higher education in particular is probably the best example of how Canberra has used its financial powers to seize control of a whole field of activity.

A few weeks ago I commented on how comfortable the Howard government had become in its centralism, forging plans to expand into yet more areas of state activity and attacking Kevin Rudd’s ALP (with minimal evidence) for being the puppet of state Labor governments. When so many other democracies are discovering the advantages of federalism, Australia is moving in the opposite direction: to a single, large unitary state, that just maintains branch offices in the state capitals.

But this isn’t a story of relentless expansion by Canberra met by valiant but futile resistance from the states. On the contrary, state governments have been willing accomplices in their own demise.

When the Menzies government first moved into higher education in a big way, the states were happy to accept the extra funding. What’s not to like? Here’s someone giving us money! The strings attached at first seemed insignificant.

Primary and secondary education followed; ditto hospitals, roads, conservation, and much more. States were still taking the credit for spending, but didn’t have to worry about raising the money. Economists gave this the ungainly name of “vertical fiscal imbalance”. State governments sometimes complained, but privately they thought they were getting a great deal.

We don’t hear so much about VFI any more, because it’s become obvious that control has passed to Canberra as well. The federal government raises and spends the money; the state’s name just appears on some of the paperwork. This morning it’s reported that Canberra, which now provides 98% of their government funding, is proposing to eliminate the last vestiges of state control of universities. Education minister Julie Bishop describes them as a “historical anomaly”.

Do we need some national coordination in higher education? Of course.

But that could be supplied by cooperative arrangements among the states, with the feds taking a facilitative role. There’s no reason why the money, and therefore ultimate power, has to come from Canberra.

The debate over the future of federalism is a sleeper in this year’s election campaign, and looks likely to remain so. But if Kevin Rudd has ambitions to be remembered as a reformer, this is the one big thing he needs to address.