When respected Adelaide dance company Leigh Warren and Dancers lost a quarter of million dollars of Australia Council funding late last year, there was little in the way of warning. The company simply received the notification that its “Key Organisations Multi-Year” funding had not been approved.

According to general manager Pam Lee, the funding funnel’s explanation was that “other companies had more compelling arguments for funding”.

“It was unexpected because last year was possibly one of the best years in the company’s history,” says company founder and director Leigh Warren. “That doesn’t seem to me to add up. We were in three festivals in a row, and you can’t say we didn’t reach audiences because there were 15,000 at WOMADelaide.”

“Obviously there’s been a shift of priorities that we don’t know about, and that’s what threw us. They do have some sort of internal benchmarking system that we don’t know about, but we have fulfilled the criteria and we fulfilled them well. It seems to me that the Australia Council has lost track of its original purpose, to be perfectly honest. You can’t just look at it like a horse race.”

Warren explains governance was also cited as a reason to withdraw funds. He’s miffed: “We have a fantastic board. We have run our company perfectly well for all these years: we have never been in debt, we have never had a financial problem, unlike other companies I can name. We have very good financial reserves, which is the reason we are managing this year.”

The Sydney Dance Company notoriously required a $1.5 million bail-out in 2007 after a series of disastrous box office returns under Graeme Murphy. Because the Sydney Dance Company is funded under a different category of the Australia Council, it is not peer assessed.

Warren is understandably critical of the Australia Council’s management and peer assessment processes, pointing to the fact the current review of the funding body will not be made public. “They really need a public review, not the one they’re having, this private review,” he says. “They are a public organisation, they need to be public and transparent. They’ve lost sight of their purpose. The council has become prescriptive instead of responsive.”

He also argues the council’s dance board is dominated by arts administrators rather than dancers or choreographers. Its chaired by the departing director of the Wheeler Centre for Books, Writing and Ideas, Chrissy Sharp, an arts administrator whose background includes management stints at the Sydney Festival, SBS and the Australian Writers’ Guild. The Australia Council’s director of dance is Carin Mistry, a career bureaucrat with little specialist experience in dance.

“Let’s look at what they call ‘peers’,” Warren says. “The peer assessment panel used to be [made up of] practitioners that had experience in making works, producing works, presenting works. Not just administering things. Half the board are administrators. Why do we have an administrator as chair of the dance board? I find it appalling that one of the most powerful people in dance has no dance background, and that the chair of the board is an administrator. This is wrong.

“They’re bonsai-ing the arts in this country. You don’t get to do what you really want to do. You have to fit in to their priorities of what they think art should be. It’s not up to them to define art that way. That’s where they’ve lost the plot: they need to be responsive to what happens in the arts community, not telling them what to do.”

Warren is particularly critical of the artistic vibrancy kit handed out to performing arts organisations: “Any artist can tell whether they’re vibrant or not. We know when we’ve made crap.” The reporting burden can be a heavy one for many small organisations. “It’s a miracle when I can get into the studio to make work,” he says.

Despite the setback, Leigh Warren and Dancers will continue to produce work this year. Indeed, it has been invited to perform at the Edinburgh Festival, a prestigious international arts event with considerable credibility. The Edinburgh gig is particularly ironic given that Mistry has penned an essay on the Australia Council website entitled Why the world stage is so important today for Australian dance.

“We will fulfil our obligation to the Edinburgh Festival,” Warren maintains. He thinks the opportunity of a year without onerous Australia Council reporting requirements will allow the company to explore new horizons and create new work. “The weight has been lifted off our shoulders.”

Island magazine, a venerable literary publication in Tasmania, had a similar shock last year. This time it was the state funding body, Arts Tasmania, that decided to pull the plug, yanking $68,744 of annual funding from the publisher. In its explanation of the decision, the arts advisory panel convened by Arts Tasmania argued that “hard copy literary magazines, as a model for supporting literature, are in significant international and national decline” and pointed to the $22 a copy subsidy the state government was contributing to Island: “Island is competing with publications such as the New Yorker … there was limited benefit to the Tasmanian audience of maintaining a magazine just because it was published in Tasmania.”

Island was arguably well on the way to reviving itself when the funding cut came. Under new editor Sarah Kanowski, the magazine had assembled a raft of fresh literary talent and was embarking on an ambitious digital strategy. All that is now in doubt, with Kanowski leaving for a gig at Radio National in Queensland.

In this year’s first issue of Island, Kanowski has penned a fine essay on the difficulties of sustaining a literary culture in Australia’s smallest state in the face of a state budget in deficit. Literary magazines, she argues, are just as much a public good as schools and hospitals, but “the current political taste urges us to suppress our appetite for realities that don’t come with a massive profit margin”.

Island has secured funding for 2012 with an emergency grant from the Australia Council’s Literature Board, but the long-term future looks uncertain.

Stuart Glover, a senior lecturer in writing at the University of Queensland, outgoing board member of Island, and an Australia Council literature board member, points out the incongruity of a state arts funding body arguing against publishing a literary magazine in Tasmania. “This may come as a surprise, but Island magazine is not the New Yorker,” he observes wryly, adding “it seems to be saying that, even if Island met every target and KPIs, what would be the point of a Tasmanian magazine in any case?”.

The debates about the cuts to Island and Leigh Warren and Dancers illustrate two of the key fault-lines in the arts funding debate: the fragility of many small-to-medium organisations, which are often just one funding cut away from oblivion, as well as the difficulty of supporting art in smaller centres. It seems unfair to refer to Adelaide and Hobart as “the regions”, and yet the reality is the debate about arts and culture in Australia continues to be framed with reference to Sydney and Melbourne — or even, as in the case of Arts Tasmania, New York.

Glover observes that readers of the New Yorker will find very few references to Tasmania. Warren points out he could have left for a big city years ago if he wanted. But he wanted to stay in Adelaide and make dance there.

“If I wanted to be the world superstar choreographer, I would have done that in my 40s,” he says.