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The intent of this paper is to explain the equalization program and Atlantic accord. First, what is equalization, why does the program exist, and how is it calculated?

Are there problems with today's equalization program? Next, what is the Atlantic accord and generic solution and why has it been an issue in the past six months? What were the offers the federal government gave Newfoundland and what was finally accepted by Newfoundland's provincial government? Finally, what do the future hold? Can the Atlantic accord deal affect the equalization sustainability? What are the other equalization formula, policy options? These are the issues that this paper will try and address.

What is Equalization?

The equalization program has its roots in the Rowell-Sirois report of 1940 and in 1950 James M. Buchanan defined payments that the federal government made to "weaker" provinces as equalization payments. Canada implemented the equalization program in 1957 and has been making unconditional grants since then. Today the department of financial Canada defines equalization as a:

"Federal transfer program that allows provinces, regardless of their ability to raise

revenue to provide roughly comparable levels of services at roughly comparable levels of taxation. Eligibility to receive equalization funding is determined by a formula measuring each province's revenue - raising capacity against five - province standard."

Note: The five provinces are British Columbia, Saskatchewan, Manitoba, Ontario and Quebec.

Equalization is so important that it has been acknowledged within the Constitution:

"Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation."

However, equalization today is not the same as in 1957 due to updating and renewing (Equalization is renewed every 5 years). The Principle idea that all citizens within Canada should have the same quality of public goods no matter what the provincial government's revenue capabilities are remains the same.

Why Equalization?

There are several reasons why Canada has adopted the equalization program. First, there are the vertical and horizontal imbalances between provinces and country. Next, Canadian provinces have a strong preference for provincial autonomy. Third, there is need for economical and political equity between provinces. Finally, equalization is needed for economic labour mobility efficiency within the feudalism.

The first step in understanding why Canada has an equalization program is to understand what is meant by vertical and horizontal imbalances.

"A vertical imbalance occurs when the main taxing power and ability is concentrated in the central government while expenditure responsibilities are concentrated in the regional government. A horizontal imbalance occurs when the regional governments in the federation have varying capabilities among themselves to meet public needs, and therefore posses' sometimes widely differing capacities to meet their constitutional responsibilities. "

A vertical imbalance implies that a mechanism has to exist to transfer funds from "collector" to "spender"; spenders being those with the responsibility of supplying public goods. The horizontal imbalance implies that within the federalism each territory can have different revenue generating capabilities. If this difference exists then a mechanism is needed to insure that all citizens have access to the same quality of public goods.

The next reason why Canada has an equalization program is because of provincial autonomy. Within Canada there is great diversification between provinces and a strong sense of self, "I am



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