Flaherty pledges $39B over seven years for provinces

Federal Finance Minister Jim Flaherty pledged Monday to give the provinces $39.4 billion over seven years to fix the so-called fiscal imbalance, but not every province was happy.

Flaherty's2007-08 budget includes anextra $1.5 billionin equalization payments aimed at correctingthe fiscal imbalance — the contention that the provinces are not getting their fair share of the money Ottawa collects.

"We are keeping our commitments to equalization," Flaherty said in his budget speech.

Equalization is a redistribution program that transfersmoney to provinces thatare less wealthy to pay for social services. The federal government is required under the Constitution to make these payments so thatall provinces have enough revenue to provide their residents with comparable levels of public services atcomparable rates of taxation across Canada.

In 2006-07, the equalization program cost the government $11.5 billion, with the bulk going to Quebec, Manitoba and New Brunswick, which received $5.5 billion, $1.7 billion and $1.5 billion, respectively.

Hoping to protect their oil and gas royalties from being clawed back through reduced equalization payments, Saskatchewan andNewfoundland and Labradorhave been adamant that Prime Minister Stephen Harper abide by his election promise to exclude non-renewable resource revenue from the equalization formula.

Flaherty willallow provincestoreceive equalization paymentsbased either on the compromise recommendationfrom the Al O'Brien report to include 50 per cent of resource revenue in the formula, oronone which entirely excludes resource revenue — whichever results in the greater benefit.

However, he imposed a cap on equalization payments.

Newfoundland and Labrador Premier Danny Williams told CBC News that he was disappointed.

"I don't think an Irishman named Jimmy Flaherty would disappoint so much as he did today," Williams said. "Newfoundlanders and Labradorians are feeling an intense sense of betrayal here by this government."

Saskatchewan Premier Lorne Calvert also said the budget was unacceptable tohis province's residents.

"This is smoke and mirrors," Calvert said.

Liberal MP Ralph Goodale, a former finance minister from Saskatchewan, said no matter what option provinces choose, they are hindered by the cap.

"That cap meansSaskatchewan gets not $800 million, but $226 million once, and there's no commitment thatmoney will be ongoing into future years."

Quebec to get bulk of payments

Quebec, which goes to the polls in a provincial election next Monday, will get the bulk of the extra equalization money, roughly $698 million in 2007-08.

"The gains made by Quebecers today are substantial," Premier Jean Charest said.

But the news that Quebec will get the bulk intransfer payments disappointed B.C.

"This is more about politics in Quebec and Central Canada than it is about strategic importance for British Columbia and Canada,"said B.C. Revenue Minister Rick Thorpe, whose province will get $226 million in 2007-08.

On Monday, Flaherty took pains to mollify vote-rich Ontario.

Ontario and Alberta, which receive no benefit from equalization, have long complained that they're deprived of their full per-capita share of other cash transfers. That's resulted in a $1.1 billion annual shortfall for Ontario alone, Ontario Premier Dalton McGuinty has said, a gap hehas been insisting must be closed.

Flaherty has earmarked $700 million to boost social transfers to Ontario and Alberta. He also promised legislation to ensure strict per-capita distribution of health-care transfers after 2014, when the existing, 10-year health accord with the provinces expires.

He said the new cap on equalization payments will ensure that no have-not province winds up with greater fiscal capacity than Ontario.

Ontario, Alberta pleased with budget

Ontario Finance Minister Greg Sorbara said there's enough in the budget "to say we made real progress and we're pleased with that progress."

Alberta Premier Ed Stelmach was also pleased with the budget.

"We're supportive of the direction the feds are taking," Stelmach said. "So that is a giant, giant step in the right direction."

Flaherty gave Nova Scotia, whichsigned separate accords to shield its offshore resource wealth from clawbacks, the option of sticking with the existing equalization system until those accords expire or opting into the new one.

And he instituted three-year transition measures to shield British Columbia, with its skyrocketing housing prices, from the move to include market-value property tax bases in the equalization formula.

Flaherty has criticized the previous Liberal government for custom-tailoring provincial transfers. He repeatedly boasted Monday that his budget returns equalization to a "principle-based" formula for equalization.