The federal budget has introduced a new equalization program as part of its solution to the federal/provincial fiscal imbalance. Because this is a federal program, it doesn’t need provincial agreement and the Conservatives plan to legislate it.

The fiscal imbalance saw Ottawa piling up surpluses while most provinces struggled to stay out of deficit. Correcting this imbalance was a major election promise.

The rest of the package includes additional transfers under the Canada Social Transfer and for environmental initiatives, labor market training and infrastructure.

The whole package increases transfers to the provinces by $3.1 billion in fiscal 2007, by $2.4 billion in 2008 and by $2.7 billion in 2009.

The new equalization program, which the provinces will see for the first time with the release of this budget, uses a 10-province average fiscal capacity rather than the previous five province-average – Ontario, Quebec, British Columbia, Manitoba and Saskatchewan. It also includes only 50% of resource revenue rather than 100% to calculate a province’s equalization entitlement. These factors make for a fairer and simpler program, Ottawa hopes.

A further refinement is the introduction of a fiscal capacity cap, which reduces entitlements for any province whose equalization entitlement, as calculated above, gives them more fiscal capacity than any of the non-equalization receiving provinces, when fiscal capacity is calculated using 100% of resources.

Most of the additional money for the Canada Social Transfer comes from the move to equal per capita cash transfers for all provinces. Previously some provinces, notably Alberta and Ontario, received a good deal less on a per capita basis. There’s also $250 million of new funding within the CST for creating day care centers.

The budget introduces a new labor training program amounting to $500 million a year and confirms the creation of the Eco-Trust, which provides $1.5 billion of funding from which the provinces can draw for environmental initiatives.