Equalization Reform in Canada: Principles and Compromises

Abstract

After nearly fifty years of life as a formulabased program driven by evolving inter-provincial differences in fiscal capacity, Equalization was severed from its foundations in 2004 by a unilateral federal decision that established both the total level of the entitlements in 2004-05, their growth over time, and the interim allocation among provinces for three years. Under the New Framework, the federal government (a) set the total level of entitlements for 2005-06 at $10.9 billion, and guaranteed that no province would receive less than had previously been announced, (b) set a guaranteed growth rate of total entitlements at 3.5 percent per year, (c) used fixed shares for receiving provinces for the first two years of the new program, later extended also to 2006-07, to allocate the total amount, and (d) in March 2005 established a Panel of Experts “to review a broad range of issues” related to Equalization. Two months later, the Council of the Federation established its own Advisory Panel on Fiscal Imbalances with a broader mandate which included an evaluation of both horizontal and vertical fiscal imbalances.