Federalism. Under threat?

Australia is a federation (of states). We have 3 tiers of government; local (shire and city councils), states and territories (6 + 2+, Queensland, NSW, Victoria, Tasmania, South and Western Australia, the Northern Territory, the ACT - Canberra, and some external territories - Christmas, Lord Howe, Norfolk Islands etc), and we have the biggest, most expansionist of the lot - the federal government.

So, having noted the federal government expanding into the areas that historically are the area of responsibility of the states, I take extra notice when I see this entry at Catallaxy - which is coverage of this piece;
Our PM Howard says; that Australian’s “don’t care about theories of governance” in the delivery of basic services, but rather are only interested in “good outcomes”. He goes on to claim that people don’t care about which level of government delivers services and that they in fact want more Commonwealth intervention.." (from the Catallaxy entry).
I take note of that assertion, and disagree.

"In all that people can do for themselves, government ought not to interfere".

"The legitimate object of government is to do for a community of people whatever they need to have done, but cannot do at all in their separate and individual capacities".
Abraham Lincoln.

Those ideas strike a chord with me. Although some call me a neo-con, others a libertarian, I seek the practical centre (IMHO, both the far left and far right are as dangerous to individual freedom and human happiness as each other).

I disagree with Howard on this. I don't have a problem with differing tiers of government handling different responsibilities. (Though I do have a problem when there is duplication of services). If competition is good in the business marketplace, then why not also at the governmental level?
I believe people should do what they can for themselves (eg superannuation), be able to buy goods and services in the free marketplace at prices set competitively by market forces (or indeed form co-operatives if they so desire), and have government do what they can't do, or do so well for themselves (as Lincoln says "in their separate and individual capacities").

And governmental services should be handled at the lowest level possible - the federal level should not be doing what the states can do, nor should the states do what the local government tier can do - and they all should stay out of our affairs to the maximum extent possible.

Competition. If one local government area meddles too much, or charges too much in rates, then we have the right to point out the one 'just next door' does so much better than ours, (or vote in some who will do better), or, if necessary - move areas. Likewise the states. But if the federal sphere stuffs things up bigtime - what choice then - move to another country? (If both sides of the political process seem to have the same tendencies? Get really active - demonstrations and the like).