Canberra's town centres – once heralded as a triumph of town planning – are actually stopping the city's government-reliant economy from diversifying, a report says.
And the separation is also affecting the quality of Commonwealth governance, according to the State of the Regions report.
The 17th report - published on Monday by the Australian Local Government Association - labelled Canberra as a "knowledge city par excellence", with an economic base that was almost entirely within the knowledge economy.
However, the report said Canberra's main five "office clumps" had been designed for convenient car-parking, which limited the number of jobs that could be accommodated within "journey-to-meeting distance".
The report, prepared by National Economics, said the clumps were too close together to be the centres of separate labour markets, but too far apart to act as a satisfactory metropolitan centre.
"This is good neither for the quality of Commonwealth governance nor for the prospects of diversifying the Canberra economy," the report said.
"[Canberra] has enough offices to form one reasonably-significant CBD – with employment, say, 150,000 - but instead has four or five major clumps of offices, one of which Civic is now acknowledged as its CBD and two more of which are 'town centres' which in theory provide both employment and retail services for a surrounding group of suburbs.
"They are too small to reap the economies of agglomeration generated by the knowledge economy; they lack the ease of pedestrian interaction which would have been possible had they been co-located."
The report found this geographic separation had prevented Canberra breaking free of its dependence on the Federal Government and presented barriers to a diversified local economy.
Dr Ian Manning, of National Economics, said a strong central city would prove a better recipe for Canberra if it were to fully embrace the knowledge economy.
"Canberra has an enormous range of skills and innovative firms so it's time to come forward and build the knowledge economy to offset the negatives from government cutbacks," Dr Manning said.
The report also said the ACT continued to enjoy some of the most affordable housing, relative to the high incomes enjoyed by Canberrans.
The territory was considered one of the most equal of Australia's regions and continued to enjoy the highest average level of wages, salaries and supplements per capita.
"Though this level has been declining with tightening Commonwealth budgets," the report said.
Nationally, the report warned of increased inequality unless there was new investment to strengthen the economy as the mining boom subsided.
The report recommended stronger partnership between the Federal Government and local governments – through local infrastructure investment - to improve the country's economic performance.
ALGA president, Mayor Troy Pickard, said the success of programs, such as Roads to Recovery, highlighted the value and effectiveness of direct partnerships between levels of government to deliver jobs and economic stimulation.
"However, the decision … in the federal budget to freeze the indexation of financial assistance grants funding will cost local government an estimated $925 million over the forward estimates," Mr Pickard said.
"[The] grants are particularly important for poorly resourced council, are a major element in the national strategy to combat inter-regional inequality.
"Every year's delay in the adoption of this approach imposes significant costs on the national economy by limiting the growth potential of both country and metropolitan regions."