19 March 2007

Equalization changes in summary

The federal budget contains few, if any, surprises when it comes to dealing with the so-called fiscal imbalance.

The Flaherty budget will make the following changes to Equalization:

- Reintroduce a formula based on all 10 provinces. That will have the effect of raising the amount of money in the system overall. The current system, in place since 1982 uses five provinces to determine the standard.

- Reduce the formula from 33 bases to a mere five. That will make the system much easier to figure out.

- Exclude 50% of resource revenues from the calculations. That's not what Harper promised for two elections in a row but it is exactly what an expert panel recommended. Right now 100% of all resource revenues are included in calculating Equalization entitlements. That's the system Danny Williams wanted to continue when he wrote his letter to the federal party leaders during the last election.

- Provinces can opt to take whichever is greater of the 50% exclusion or the 100% exclusion of non-renewable revenues only. Again, that isn't what they promised but that option is specifically designed to deal with Nova Scotia and Newfoundland and Labrador. Note the last sentence in the paragraph below. It is clearly designed to have the provinces opt into Equalization and abandon the offshore deals.
Fulfilling the Commitment to Respect the Offshore Accords

To respect the Offshore Accords, Nova Scotia and Newfoundland and Labrador may continue to operate under the previous Equalization system until their existing offshore agreements expire. This fulfills and builds upon the Government’s commitment to respect the Offshore Accords and ensures that these provinces will continue to receive the full benefit that they are entitled to under the previous system. These provinces can permanently opt into the new Equalization system at any point in the future. [Emphasis added]
- Cap transfers such that no province can have a fiscal capacity in excess of Ontario. Equalization is intended to give all provinces in the country comparable fiscal capacity and thereby ensure that all Canadians have access to similar levels of service no matter where they live. One of the complaints from non-recipient provinces has been that the combination of federal transfers can actually produce a situation where recipient provinces - like Newfoundland and Labrador - have a greater capacity than most non-recipient provinces.

The combination of all federal transfers - Equalization, health, post-secondary, social transfer and infrastructure - will give Newfoundland and Labrador about $1.5 billion in federal transfers over four years. Specifically, the amounts are as follows:

2005: $1.554 billion
2006: $1.453 billion
2007: $1.529 billion
2008: $1.554 billion