Balancing the riches: equalization is one of four major federal transfer programs. The others are the Canada Health Transfer, the Canada Social Transfer, and the Territorial Formula Financing (the main source of revenue for territorial governments). Today, the total amount of the equalization program is around 10 billion dollars a year.

The purpose of Canada's equalization program is to allow provinces to provide "comparable levels of service at comparable levels of taxation." The federal government does that by transferring cash payments to less wealthy provinces, so their citizens don't have to pay unreasonably high taxes to receive the same level of social services--such as education and social assistance--as Canadians in richer provinces.

Started in 1957, the scheme is intended to help out the poorer provinces, with payments coming from federal tax revenue. Unlike conditional transfer payments such as the Canada Health and Social Transfer, provinces can spend equalization payments in any way they choose. The payments are distributed to the provinces quarterly and the program is renewed every five years.

Figuring out who gets what and who pays what isn't easy. The federal government calculates the payments according to the revenue-raising ability of each province based on 33 different tax sources. These include personal income tax, corporate tax, property tax, and sales tax.

Ottawa establishes a standard level of tax revenue based on the average of the five middle-income provinces: British Columbia, Saskatchewan, Manitoba, Ontario, and Quebec. For 2004-05, for example, the average was $6,126 per person and any province falling below that received payments to make up the difference. (Alberta's energy revenues are so high that the federal government has removed the province's tax revenue from any calculations it makes for the national standard.)

Between 1999 and 2004, $50 billion was transferred to the provinces in equalization payments.

Ontario and Alberta are the only provinces that do not receive the payments; Ontario is the only province that has never received them. Alberta was a recipient from 1957 to 1964, while its oil and gas industries grew. The rising price of oil and other commodities (potash, and base metals mining) helped Saskatchewan improve its finances so that in 2004 it joined the ranks of the "have" provinces, dropping its need for help from Ottawa.

Until the late 1990s, British Columbia was one of Canada's "have" provinces with a bustling economy. When the equalization program started, BC and Ontario were the country's richest provinces. But, with strong economic ties to Asia, BC was hit hard by that region's financial crisis of 1997. Lumber disputes with the United States also had a negative impact on the province's economy, In 1999-2000, BC received equalization payments for the first time, totalling $125 million. In 2003-2004, it received $332 million dollars, due to the negative effects of Severe Acute Respiratory Syndrome (SARS), the Bovine Spongiform Encephalopathy (mad cow) crisis, and extensive forest fire damage.

In 2004, the federal government and the provinces agreed to a new formula for equalization payments that increased the funding given to "have not" provinces. Some of the "have nots," including Manitoba, New Brunswick, and Quebec, accepted the deal reluctantly. They complain that the payments are too low and are unhappy with a new per capita formula to be introduced in 2005-06 that will award cash based on population size.

This is all very normal because, when it comes to money there are endless squabbles among the provinces: "We're paying too much;" We're not getting enough."

The main features of the new equalization agreement are as follows:

* Increased funding for the 2004-05 fiscal year from a planned $8.9 billion to $10.8 billion;

* A commitment to provide more stable funding in the future. An "escalator clause" guarantees that provincial equalization payments will increase by 3.5% annually. This is a significant change. Until this agreement, the total amount of equalization the federal government paid out each year would rise and fall with the performance of the national economy; and,

* Creation of a five-member independent panel of experts to review the equalization program, which will include two provincial representatives.

SUGGESTED ACTIVITIES:

1. While equalization payments are meant to help Canada's poorer provinces, critics say they catch recipients in a welfare trap that penalizes growth and rewards dependence. Contrast this with the belief that the program is an efficient way of promoting Canadian unity / solidarity by reducing disparities.

2. John Hamm, Premier of Nova Scotia, wrote in The Globe and Mail in March 2005, "It makes sense to help strengthen a province or region because, in the long run, it works for all Canadians. Yet there's a perception that federal support in Western or Central Canada is an investment, while federal support in Atlantic Canada is a handout." Discuss.

3. The Panel of Experts to review Equalization and Territorial Formula Financing (ITF) was established in March 2005. The federal government asked the Panel to report no later than 31 December 2005. Do a follow-up report on the Panel's recommendations.

Websites

Canadian Centre for Policy Alternatives (equalization payments) --http://www.policy alternatives.ca/index.cfm? act=search&SearchType=sim pie&search=equalization+pay ments&submit=go

Institute for Research on Public Policy--http://www. irpp.org/newsroom/ archive/2005/ 083105e.pdf

Frontier Centre for Public Policy (equalization)--http:// www. fcpp.org/issue_jump. php?IssueID=4&Sub CategoryID=1

FACT FILE

For several years, more than 40 percent of Newfoundland and Labrador's provincial revenue has come from equalization payments.

FACT FILE

The 1982 Constitution Act creating a new constitution included the rights of the poorer provinces to equalization payments.

FACT FILE

Newfoundland has an $11 billion debt, while Nova Scotia faces a debt of $12 billion.

FACT FILE

For 2005-06, funding for the Territories will be set at $2 billion, from $1.9 billion for 2004-05: $799 million to Nunavut ($26,574 per capita); $714 million to the NWT ($16,466 per capita; $487 million to Yukon ($15,331 per capita). For subsequent years, funding will grow by 3.5 percent annually.

RELATED ARTICLE: Resource revenue.

Oil and gas have made Alberta Canada's richest province, but Alberta collected equalization payments for seven years while these industries grew. The oil boom staffed in the 1950s and natural resources weren't included in the calculations of a province's wealth (total tax revenues) until 1964. Now, Newfoundland and Labrador, and Nova Scotia want the same treatment in developing their offshore resources. (Legally, offshore resources belong to the federal government, but because Alberta's oil and gas are on land they're under provincial jurisdiction.)

Prior to 1994, equalization payments were reduced by the same amount that revenue increased: the provinces argued that they' had no incentive to develop natural resources if they lost all of their gain by a drop in equalization payments. So, in 1994, the federal government staffed to apply the "generic solution" to the provinces of Newfoundland and Labrador, and Nova Scotia for offshore revenues. This scheme also applied to Quebec for asbestos and Saskatchewan for potash resource income. Under the generic solution, Ottawa fakes back only 70 percent of revenue from the development of non-renewable natural resources.

Newfoundland and Labrador, and Nova Scotia also operate under the Atlantic Accords, which protect them from losing any revenues gained from their developing industries. The Nova Scotia deal protects the province for 10 years against a reduction in equalization payments beginning in 2000-01. In the first year, Nova Scotia loses only 10 percent of its offshore revenues in reduced equalization payments. This amount is reduced by a further 10 percent each year (20 percent in the second year, 30 percent in the third year, and so on) until it equals the amount available through the generic solution, which fakes back 70 percent of resource revenue.

In 1985, the federal government struck an agreement with Newfoundland that took effect in 1999-2000, and protects the province for 12 years. The deal guarantees Newfoundland and Labrador at least 85 percent of its equalization payment from the previous year, and as much as 95 percent, depending on the province's revenues compared to other provinces.

Neither province was happy with the arrangement that they eventually would be subject to the generic agreement guarantee of only 30 percent of offshore oil revenues once the Atlantic Accords runs out. In fact, they felt they should be able to keep all offshore oil revenues. In January 2005, they did reach a deal with Ottawa allowing them to keep all their energy revenues for eight years. The agreement will add up to a minimum of $830 million for Nova Scotia and $2.6 billion for Newfoundland and Labrador. Both provinces will continue receiving equalization payments until they have reached the average standard. Also, if they haven't reached the standard by 2012, the agreement can be extended for another eight years.

RELATED ARTICLE: Us too, us too.

The deals the federal government struck with Newfoundland and Labrador and Nova Scotia weren't likely to slip by other regions. They were cheered by Saskatchewan, whose Finance Minister Harry Van Mulligen said, in February 2005: "We take the position that we rejoice in their good fortune." Saskatchewan loses about 90 percent of its oil and gas royalties to the federal government. The province figures that a similar deal to the Atlantic Accords would have meant an additional $4 billion to the provincial treasury over the past decade. The province continues to press the issue, which the federal government has referred to the panel on equalization, established in March 2005.

Ottawa argues that Saskatchewan is actually in pretty good shape: in fact, the province recently reached the financial status of a "have" province. However, Mr. Van Mulligen says federal clawbacks of its energy revenues are far from fair and equitable.

Saskatchewan's Premier Lorne Calvert says the Atlantic Accords have established a principle that non-renewable-resource revenues should not be considered in the calculation of equalization payments.

New Brunswick would like to negotiate a deal of its own too. A spokesman for New Brunswick Premier Bernard Lord said " ... the feds have opened the door for all other provinces to come and negotiate side deals," adding that New Brunswick is certainly among them. "We have had our royalty payments for non-renewable resources calculated in the past, so we will definitely want to be discussing that."

British Columbia wants to protect future offshore energy projects as well. Bloc Quebecois Leader Gilles Duceppe also wants the same treatment for his province's hydroelectric power. And, Ontario has complained that it continues to contribute $23 billion more to the federal treasury than it receives in transfer payments.

Nunavut's Finance Minister also wants Ottawa to negotiate a similar resource-revenue sharing deal to the Atlantic province arrangements. In February 2005, Leona Aglukkaq pointed out that only four cents out of every dollar of resource revenue stays in the North.

REGIONALISM--EQUALIZATION

Total Equalization Entitlements (1993-94 to 2004-05) [in millions]

Year               PEI       NB        NL         NS         MB

1993-94            175      835       900        889        901
1994-95            192      927       958      1,065      1,085
1995-96            192      876       932      1,137      1,051
1996-97            208    1,019     1,030      1,182      1,126
1997-98            238    1,112     1,093      1,302      1,053
1998-99            238    1,112     1,068      1,221      1,092
1999-00            255    1,183     1,169      1,290      1,219
2000-01            269    1,260     1,112      1,404      1,314
2001-02            256    1,202     1,055      1,315      1,362
2002-03            235    1,143       875      1,122      1,303
2003-04            232    1,142       766      1,130      1,336
2004-05 (1,2)      277    1,326       762      1,313      1,607
2005-06 (1)        277    1,348       861      1,344      1,601

Year                QC       SK        BC     Canada

1993-94          3,878      486         0      8,063
1994-95          3,965      413         0      8,607
1995-96          4,307      264         0      8,759
1996-97          4,169      224         0      8,959
1997-98          4,745      196         0      9,738
1998-99          4,394      477         0      9,602
1999-00          5,280      379       125     10,900
2000-01          5,380      208         0     10,948
2001-02          4,679      200       240     10,310
2002-03          4,004      106        71      8,859
2003-04          3,764        0       320      8,690
2004-05 (1,2)    4,155      652       682     10,774
2005-06 (1)      4,798       82       590     10,900

(1) Figures reflect increases resulting from the new framework on
equalization announced by the Prime Minister following the October
2004 First Ministers' Meeting. (2) These figures incorporate the
protection provided to provinces against declines in equalization as
announced. These figures do not include the additional 5150 million
in equalization announced in Budget 2004.