She has also questioned the viability of many small Aboriginal communities in outback Australia.
In a speech to the Australian National University on Thursday night, she declared the last 30 years of indigenous policy had been a failure.
“Life for too many of our first Australians continues to be unhealthy, unhappy, violent and short,” Senator Vanstone said.
“For first Australians, this cannot be as good as it gets, it cannot be the best we can do. We can, and we must, do better. All of us.”
But she said indigenous people also needed to play a part in ensuring they got a better deal.
Such massive change would require tough decisions, she said.
“We must back indigenous Australians in their aspirations and in building their future,” Senator Vanstone said.
“The time for thinking that we know what’s best for indigenous Australians has passed.”
She took a swipe at indigenous advocates who believed pushing money at the problem was the answer.
“The environment will be challenging for those who are comfortable indulging in what has been called conspicuous compassion, a culture of ostentatious caring which is about feeling good, not doing good,” Senator Vanstone said.
“Caring but not making change condemns Aboriginal people to some sort of cultural museum where they should expect less than others.
“Some people find conspicuous compassion quite therapeutic – for themselves.”
The minister also questioned the viability of about 1,000 outback communities, where there were problems with water, rubbish, sewerage and truancy.
“Despite the higher rate of population growth of Aboriginal people, it is unlikely that many of these homelands will grow to become viable towns,” Senator Vanstone said.
“We have started talking to the Northern Territory and other governments about these issues.
“Listening to indigenous Australians does not mean blindly accepting, for example, that services like education, health and housing can be delivered at equal levels and equally well in townships and the homelands for the same people.
“We have to be realistic and we have to be honest.”