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Ken Boessenkool

Stick to the formula on equalization Add to ...

The recent hankering for special deals under the equalization program demonstrates exactly why special deals should not be granted. For in the long run, special deals will only threaten to undermine the program itself.

For nearly its entire history, equalization has been driven by a mathematical formula. While there has been tinkering around the edges, payments from the program have been generated from a set of data fed into those mathematical formulas and the data that came out the other end determined what provinces received. In short, formulas have historically driven the total dollars spent on equalization as well as the allocation of those dollars across provinces.

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And while there has been no end of politics around the equalization program, this fact - a data-in, data-out formula for determining payments - has been historically effective in preventing the program from being politically driven. The best evidence for this is that substantial changes to the program occurred very rarely - only about once per decade between 1970 and 2004 - and never strayed from the formula-driven approach.

For more than 30 years, most of the debate around equalization centred on particular data points, with recipient provinces trying to argue for data points that favoured their province. But so long as the basis of the program remained unchanged, these disputes took place among bean-counters in provincial and federal finance departments.

While the move away from the data-in, data-out approach started with various floors and ceilings on payments in the late 1990s, the most egregious departure occurred in 2004. That is when the previous federal government proposed a new framework for equalization that had an entirely arbitrary determination of the total dollars spent, and an entirely arbitrary determination of how they were allocated. To make matters worse, the same government went on to conclude ad hoc side agreements with some provinces, but not others.

This, in turn, undermined the legitimacy of the equalization program. Receiving provinces that didn't get special deals made a legitimate argument that everyone should be treated equally under the program. Non-receiving provinces made a legitimate argument that total spending on equalization was no longer anchored by a principled data-in, data-out approach and should be shrunk.

The higher purpose of equalization is to give provinces the ability (i.e. comparable access to revenues) to run comparable programs in areas of provincial jurisdiction with minimal interference by Ottawa. This is a critical point. Equalization is primarily a political bargain between provinces that makes it possible for wealthier and less wealthy provinces to run their own distinct social programs in areas such as education, health care and welfare. It is noteworthy that the United States - without a similar equalization program - has much more federal interference in matters such as education, health care and social services.

Equalization is, in this sense, manifestly in the interests of the wealthier provinces that do not receive equalization - it affords them more autonomy to design social programs to better meet the needs of their own population.

Equalization can survive only if payments are driven by a data-in, data-out approach. In the 2007 budget, the federal government proposes a road map to return equalization to a formula-driven approach while minimizing disruption in the amount any province receives. The budget also proposes transition mechanisms to make sure each province receives at least as much (and in most cases more) under the new program's parameters than they would under the previous ad hoc regime.

The recent budget reforms are a significant victory for those who want equalization to return to the stability of the previous three decades - where equalization debates were limited to bean counters, where less wealthy as well as more wealthy provinces understood the higher purpose of equalization, and where we had a program that treated provinces equally.

Yet in their response to these changes, some recipients of equalization have begun advocating for a return to special deals under equalization - in essence, a return to the ad hoc approach that so undermined equalization in recent years.

Undermining equalization certainly has its share of fans, but you wouldn't expect some of Canada's largest recipients of equalization to be among them. Ottawa mustn't give in to the pressure to make special deals.

KEN BOESSENKOOL

Vice-president and general manager of Hill & Knowlton Alberta and research fellow at the Canada West Foundation

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