A report commissioned by the federal government is proposing controversial new formula to tackle the divisive issues of equalization.

The expert panel entrusted with putting together the report titled Achieving a National Purpose: Putting Equalization Back on Track released its recommendations on Monday. The panel is recommending that the following actions be taken in order to put equalization “back on track”:
– A renewed equalization formula should be developed to determine both the size of the equalization pool and the allocation to individual provinces;
– A 10-province standard should be adopted instead of the current five-province standard;
– A cap should be implemented to ensure that no receiving province ends up with fiscal capacity higher than that of the lowest non-receiving province as a result of equalization;
– Equalization should continue to focus on fiscal capacity rather than assessing expenditure needs in individual provinces;
– Equalization should be the primary vehicle for equalizing fiscal capacity among provinces;
– 50% of provincial resource revenue should be included in determining the overall size of the equalization pool;
– User fees should not be included in the formula;
– Measurement of residential property tax revenues should be based on market value assessment;
– Steps should be taken to simplify the Representative Tax System (RTS);
– The existing intergovernmental process should be retained and made more open and transparent rather than establishing a permanent independent commission.

“On equalization, the panel consulted with the provinces and experts, weighed the pros and cons of different options and did a thorough technical analysis of the impact,” says panel chairman Al O’Brien, former deputy minister of finance of Alberta. “The result is a balanced package of recommendations that gives governments a workable solution to put equalization back on track. We heard from almost every source that the program should be fixed not abandoned.”

Meanwhile, given the unique circumstances in the north and the distinct differences in the objectives of territorial formula financing, the panel devoted a separate report to TFF issues and recommendations titled Achieving a National Purpose: Improving Territorial Formula Financing and Strengthening the Territories.

The panel recommends additional funding of $60 million for 2007-08 and a return to three separate, principle-based formulas.

The federal government established the panel to undertake an independent review of the equalization and territorial formula financing program following on an agreement reached by first ministers in October 2004. The panel’s goal was to examine ways to strengthen these important transfer programs that ensure that Canadians comparable public services at reasonably comparable levels of taxation.

The panel took over a year to consult with provinces, territories, experts and interested Canadians, and to conduct detailed analysis of options.

Quebec’s Minister of Finance, Michel Audet, described the report as a “positive and substantial contribution.

“This is the second report by independent experts in two months to recommend that the federal government bolster the equalization program,” Audet observed.

He also noted that the approach recommended by the equalization report ties in closely with the recommendations made by Quebec over the past year to committees that have examined the issue of the fiscal imbalance and equalization.

“As I indicated to the Commons Committee on the Fiscal Imbalance, the Committee of the Council of the Federation on the Fiscal Imbalance and the expert panel chaired by Mr. O’Brien, the equalization program must be based on clear principles of general application, which implies using a standard that corresponds to the average of the ten provinces and a formula that is fair to all the provinces,” Audet noted.

On the question of natural resources, Audt is onside with the report. “I note once again that this is the second report in two months to indicate that it would be a mistake to completely exclude natural resources from equalization,” he indicated, noting that on this issue, Québec maintains its position: all provincial revenues must be included.