State premiers, crunching the numbers in the days after Budget 1.0, screamed blue murder. NSW ' schools and hospitals stand to lose $25.5 billion over a decade. Victoria was staring at the loss of $19.9 billion. The pain was scheduled to start for hospitals from 2017-18 and for schools from January 2018. In addition to that big saving the Coalition calculated a political divided, too – state premiers would make the case for a GST rise, too. Or so the too-clever-by-half strategists thought. It didn't quite work out that way. Instead, NSW Premier Mike Baird labelled the cuts a "kick in the guts" and an attempt by Canberra to "starve them out".

Former Victorian Premier Denis Napthine, staring down the barrel of an eventual election defeat, said he had no intention of arguing for a GST increase. Eventually, after months of division, Prime Minister Tony Abbott launched mooted white papers on federation reform and on the tax system, giving a framework to and forum for the dispute. An uneasy calm settled. Treasury officials in the lock up confirmed that a revised 10-year projection, through to 2025-26, for the savings that would be generated had not been calculated this time around and were not available. Given that Labor's Bill Shorten and Chris Bowen had used the figures for months to beat the government around the head for months and win the argument about fairness and about broken promises, perhaps this was no surprise.

Even as the government has walked away from so much of what it got wrong in its first budget, jettisoning ideology and embracing equity with an eye to the polls, the $80-billion hole remains. Which is what makes the Treasurer's comments about the funding cuts, during the press conference in the budget lock up, so curious. "Some of the states are running surpluses; we are not running a surplus. "Over the next four years, real growth in health spending and education spending is 6 per cent, that's in real terms." Labor had locked in "pie in the sky unfunded spending" that was not affordable, Hockey said, and the money was being spent in the period beyond the four-year forecasts the budget.

All of the above is, mostly, true. Budget paper three shows, for example, that the whole dollar amount paid by the Commonwealth to the states to support health services will grow from $16.4 billion to $17.2 billion between 2014-15 and 2015-16. But health spending as a proportion of total Commonwealth spending will fall in the same period, from 35.5 per cent of $46.3 billion to 34.4 per cent of $50 billion between 2014-15 and 2015-16. Similarly, the appearance of the 2018-19 "out" year confirms the slower growth trajectory for funding. In a budget that pursued one political objective above all others – winning back friends and repairing the damage of Budget 1.0 – it was a careless line. Make no mistake, the battle with the states will be re-joined.

As Paul Keating observed, it is never wise to stand between a Premier and a bucket of money. A Council of Australian Governments "leaders retreat" is on the near horizon in July; cranky West Australian Premier Colin Barnett has been only temporarily placated by a one-off payment to compensate for lost GST and while, as Abbott observed at the last COAG meeting, there is a short 12 months before another election will be held in Australia, that's a relatively small window. State Premiers, Liberal and Labor, will not carry the can for Abbott or Hockey.They do not have, at present, the ability to raise the billions in additional funding to cover the shortfall deliberately created in the first Hockey budget. Budget 2.0 has not fixed the problem Budget 1.0 created for the states; nor has it, mostly, even mentioned it. Sooner or later, Abbott and Hockey will have to confront this reality.