Royal Commission on the Economic Union and Development Prospects for Canada, 1985
8.1 This fundamental principle is still the driving force behind the federal government's 40-year-old equalization program, which in 1996-97 transferred $8.5 billion in unconditional funds to the relatively poorer provinces. Equalization is a responsive program that requires continuing attention and refinement if it is to stay true to its objective.
8.2 Since its purpose is to equalize provincial revenue-raising capacity, the key to its success rests on how well the Representative Tax System, the basis for this program, reflects provincial tax systems. As a result, the program must adapt to the constant evolution of these systems. The legislation requires that the program be renewed at least every five years, providing the federal government, in conjunction with the provinces, with a built-in opportunity to keep the program current. We found that this process works, but that it could be more effective if the federal-provincial committee on equalization began its review of outstanding issues earlier in each new equalization period.
8.3 We believe that there must be a solid basis for knowing how and why the program should change. In this regard, we suggest that there should be guiding principles for the construction of the Representative Tax System and for aspects of the ceiling and floor, two provisions that limit fluctuations in the payments.
8.4 Because final decisions about this program rest with Parliament, we believe that the Department of Finance should make a greater effort to educate Parliament, and the public in general, about how this very complex program works. We also believe that it could use Parliament more effectively, soliciting advice from a wider circle of interested parties, rather than relying almost exclusively on the advice of a committee of federal and provincial officials.
8.5 We found that the administrative process by which entitlements are calculated and payments made is reasonable. However, we noted that outstanding balances owed by provinces to the federal government currently bear no interest, resulting in an additional benefit to the provinces of about $38 million in 1995-96. We believe that the government should review its policy of interest on outstanding balances owed to, or by, the federal government.
8.6 We were frequently reminded by officials that the equalization program is important to the Canadian federation. However, this program is only as good as the processes that allow it to keep pace with the shifting sands of provincial tax systems. We believe that the current program and its processes for change work reasonably well, but they could be improved. This is both a challenge and an opportunity for the government, and the Parliament it serves.