OTTAWA - Of all the competing interests Jim Flaherty must try to balance in his March 19 budget, fixing the so-called fiscal imbalance between Ottawa and the provinces could prove the toughest challenge.
The finance minister's "fix'' is expected to include at least $3.5 billion extra for the provinces: about $1 billion more in annual equalization payments, $1 billion in annual transfers for post-secondary education, an already announced $1.5-billion fund to tackle climate change, and possibly more for other infrastructure projects.
But he's sure to face the same problem his predecessors grappled with -- no matter how generous you are, you can't satisfy all the provinces.
"Certainly, the fiscal balance issue has been the persistent, ongoing issue in multiple consultations over the past year,'' Flaherty acknowledged in an interview.
"The provinces cannot agree, so it's left to the federal government to sort it out.''
The challenge is complicated by the fact that the budget could well become a spring board into an election, and mollifying the provinces could heavily influence the outcome.
Then there's the added twist of the March 26 election in Quebec, the outcome of which could be determined by Flaherty's ability to deliver the goods for Premier Jean Charest, whose success is vital to Prime Minister Stephen Harper's electoral hopes in the province.
Probably the best Flaherty can hope for is to confine provincial outrage to places where it can do the least political damage to the Tories.
Judging by their pre-budget spending spree, it appears the Tories have decided it's more important to buy peace with Quebec and Ontario -- which account for almost 60 per cent of the federal seats -- than to appease small provinces like Saskatchewan and Newfoundland and Labrador.
Harper opened this fiscal can of worms in the 2006 election, when he agreed with the contention that Ottawa has more money than it needs while the provinces struggle to pay for costly social programs. Fixing that imbalance would entail boosting cash transfers to all provinces and increasing equalization, which redistributes wealth to poor provinces.
On equalization, Harper specifically promised to move to a 10-province standard for calculating the average provincial fiscal capacity, to which have-not provinces would be raised, and to exclude all non-renewable resource revenue from the calculation.
Ever since, premiers have been quarrelling bitterly over how to divvy up the spoils.
In the absence of provincial consensus, Flaherty is widely expected to adopt a compromise recommended by an expert federal panel, headed by Al O'Brien. That will mean reneging on Harper's campaign promise and including 50 per cent of resource revenue in the equalization formula, boosting the $11.7-billion annual program by almost $900 million.
Charest has embraced the O'Brien report as a sensible compromise. By virtue of its population, Quebec will get the biggest chunk of equalization funds and stands to reap the second largest chunk of any increases in per capita transfers as well.
To mollify Ontario, which receives no benefit from equalization, the O'Brien report recommended imposing a cap on equalization payments so that no have-not province will wind up with a greater fiscal capacity than Ontario. It also recommended fixing an anomaly in all other cash transfers so that Ontario and Alberta finally receive their full per capita share.
The latter proposal would remedy the so-called $1.1-billion gap which Ontario's Dalton McGuinty has made a condition for acquiescing to increased equalization.
Harper's announcement last week of $1.5 billion to expand Toronto's subway system and reduce greenhouse gas emissions "goes a long way'' toward giving the province its full per capita share of infrastructure funds, a provincial official said. But the budget must still deliver a fair deal on health and social transfers to secure McGuinty's stamp of approval.
"We're not looking for any kind of a special deal. We're just looking for the same deal that Canadians in other provinces already have," the premier said in an interview.
Ontario officials are confident the budget will give their province its full per capita share of post-secondary education funding. But no immediate resolution is expected on health transfers since Flaherty refuses to reopen the 10-year, $41-billion health care accord signed in 2004.
Saskatchewan Premier Lorne Calvert and Newfoundland Premier Danny Williams are more likely to be bitterly disappointed. In a bid to prevent their provinces' oil and gas wealth from being clawed back through reduced equalization payments, both premiers are adamant that Harper stick to his original promise to exclude such revenue.
Under O'Brien's proposed cap, resource royalties in the two provinces would effectively be entirely clawed back.
TD Bank Financial Group chief economist Don Drummond predicts Flaherty will "tweak'' the proposal so that some portion of the two provinces' resource revenues will be shielded.
But Williams doesn't appear to be in the mood to accept any compromise.
"Our expectation for the federal budget is the removal of non-renewable resource revenues from the equalization program,'' said the premier's spokeswoman, Elizabeth Matthews.
"This is not about making side deals. This about a principle that was promised to this province, Saskatchewan and indeed the country.''
Harry Van Mulligen, Saskatchewan's government relations minister, said he sees no sign that Ottawa is looking for alternate ways to satisfy his province.
Dialogue between the two governments has been "desultory,'' he said.
Harper appears to have written off Saskatchewan's NDP government, going over its head to offer goodies directly to Saskatchewan voters instead. While he's joined McGuinty, Charest and several other premiers to make pre-budget announcements in the past two weeks, Harper went solo in Saskatchewan last Friday, snubbing Calvert as he unveiled $1 billion in aid to farmers.
But Van Mulligen warns there'll be an electoral price to pay for reneging on the promise to exclude resource revenue from the equalization formula.
"I don't think (Harper) can afford to write off Saskatchewan,'' he said, noting that the Tories' 12 seats in the province could make the difference between winning a minority or a majority.
