PM tells states 'we must be clear-eyed'

Prime Minister Malcolm Turnbull has reminded state leaders there is less money to fund more demands on government, while urging them to be "clear-eyed" in their decisions.

Opening the Council of Australian Governments meeting in Canberra, Mr Turnbull encouraged the premiers and chief ministers to have a "rational and considered" discussion on improving the federation.

"We're not here to make promises which we cannot afford," he said in his opening remarks on Friday.