This report was generated in the framework of consultations by the Expert Panel on Equalization and Territorial Formula Financing. The study first presents a brief history of equalization and the evolution of its main parameters. The principal issues are discussed next, in particular the volatility of equalization payments, the integration of certain revenue sources, and the revision of standards of comparison. Certain impacts springing from these issues are also illustrated. By analyzing the evolution of equalization over the past ten years, the authors illustrate that gaps between the Canadian provinces in fiscal capacity have become more pronounced while the impact of equalization has decreased. The new equalization framework ensuing from the federal offer of 2004, including the existence of several specific bilateral agreements, is also analyzed. The authors conclude that the new framework must be abandoned and that a reform of the equalization program that respects the initial goals is required. In particular, a return to the ten-province average is recommended, along with backtracking on the fixed global envelope of equalization. Other recommendations address adding a smoothing mechanism and doing away with bilateral agreements.

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