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- Transfer Payments to Provinces -
A New Framework for Equalization and Territorial Formula Financing
October 2004
The Government of Canada has announced fundamental changes to Canada’s Equalization program and Territorial Formula Financing (TFF) arrangements. The intent of these changes is to bring stability, predictability and growth to the overall level of funding for these programs and to have third-party expert advice on the best way for the Government of Canada to allocate payments among provinces and territories.
This initiative includes three elements: a new framework for Equalization and TFF starting in 2005-06, an independent review of the programs by a panel of experts, and complete protection for provinces and territories against overall and individual declines in payments in 2004-05.
New Framework for Equalization and TFF
Starting in 2005, the Government will establish a legislated financial framework for both Equalization and TFF. The new framework will establish fixed payment levels, which will provide predictable and growing funding for provinces and territories. Funding levels for 2005-06 will be set at $10.9 billion for Equalization and $2 billion for TFF. These amounts will grow at a rate of 3.5 per cent per year.
The Government commits to review the overall funding levels of Equalization and TFF after five years and make adjustments, if appropriate, in 2009-10, taking into account evidence-based measures of the evolution of disparities and costs in the territories.
Expert Review Panel
The Government of Canada will launch a public review of Equalization and TFF by a panel of experts. The expert panel will be mandated to examine and provide advice to the Government of Canada on a number of issues.
The first is the allocation among provinces and territories of the annual Equalization and TFF allotment. The expert panel will consider the Representative Tax System approach used in Equalization and the current Gross Expenditure Base approach used in TFF, including the treatment of various territorial, provincial and local revenue sources, such as natural resources. The panel will also examine alternative approaches to measuring fiscal capacity based on macroeconomic variables and, if appropriate, indicators of expenditure needs. The panel will also be asked to examine the mechanisms of annual changes to the allocation, which reflect changes in the relative economic circumstances of provinces and territories while ensuring that payments are stable and predictable, to assist them in sound fiscal planning. For 2005-06, the Government will establish the allocation of the legislated levels for both programs pending the recommendation of the panel.
Second, the panel will be asked to examine evidence-based aggregate measures of the evolution of fiscal disparities among provinces, and of the evolution of the costs of providing services in the territories. The measures will provide information to governments and citizens to inform future federal decisions on the evaluation, at fixed periods in time, of the overall level of support for Equalization and TFF.
Finally, the expert panel will be asked to study and provide advice on whether Canada should have, on a permanent basis, an independent body to provide ongoing advice to the Government of Canada on the allocation of Equalization and TFF within the framework of legislated levels. The Government of Canada would retain accountability for decisions on allocation.
The expert panel will be asked to report back to the Government by the end of 2005. The Government is committed to having new arrangements for allocation of Equalization and TFF in place by April 1, 2006.
Providing Protection for Provinces and Territories in 2004-05
In order to provide greater stability to provinces and territories in 2004-05, the Government of Canada will ensure that Equalization payments total a minimum of $10 billion for 2004-05 and that TFF payments total a minimum of $1.9 billion for 2004-05.
In addition, each province and territory will be guaranteed that its Equalization or TFF payments for 2004-05 will not be lower than the amount announced in official estimates for 2004-05 included in Budget 2004.
Financial Impact of New Framework
Over the next 10 years, and subject to review after the first 5 years, the new framework for these programs will provide $33.4 billion more in Equalization and TFF payments to provinces and territories than the annual amounts for 2004-05 estimated at the time of Budget 2004 ($9.5 billion for Equalization, $1.8 billion for TFF).
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| Last Updated: 2006-07-17 |
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