Federal Finance Minister Joe Oliver says Canada's system of equalization and other federal-provincial transfers are fair and effective, notwithstanding a report from the Parliamentary Budget Officer saying Ottawa is short-changing Ontario by $1.2 billion.

"We have a fair and balanced and affordable and generous equalization program in this country," Oliver told reporters in Toronto on Thursday.

"It was arrived at recently– it will be looked at sometime in the future, but not now."

"We're very comfortable it fulfills the purpose intended, which is to equalize the ability of the provinces to provide the same level of services to the population of Canada."

The PBO issued a report Thursday morning questioning some of Oliver's assertions. Changes made to the equalization system, which redistributes federal tax revenue from wealthier provinces to less-wealthy ones, have disadvantaged Ontario according to the PBO.

In particular, the federal decision not to increase equalization payments faster than underlying economic growth, and Ottawa's decision not to continue the Total Transfer Protection program, which guaranteed that equalization payments wouldn't decline, each cost Ontario more than $600 million.

Quebec is the largest recipient under the $16.7 billion equalization program, getting $9.2 billion as the biggest have-not province, or 55 per cent of the total.

Ontario is still considered have-not because of its weak growth and can continue to collect transfer payments under the program, which was just renewed for another five years April 1 with some technical improvements and adjustments for GDP growth.

Ontario's share of federal equalization grew from $347 million in 2009-2010 ─ its first year as a have-not province during the recession ─ to almost $3.2 billion in 2013-2014.

For the current fiscal year, Ontario saw its equalization payments decline to just under $2 billion. Other transfers, such as the Canada Health Transfer and Canada Social Transfer, increased by 2.5 and 2.8 per cent respectively.

Finance Minister Charles Sousa says the PBO report vindicates what the Liberals have been saying since the changes to equalization system were implemented.

"The Federal government should protect Ontario as it did every other province and restore Ontario’s transfer payments rather than continuing to support an inequitable system of transfers that puts our public services at risk," Sousa said in an email today. "Actions by the federal government have put all of our shared progress at risk."

Minister of Economic Development, Trade and Employment Eric Hoskins also attended the Toronto event where Oliver spoke with reporters, and echoed the sentiments of his cabinet colleague.

"We've got a federal government that can proudly say it's balancing its budget next year, but it's doing that on the back of Ontario and other provinces," Hoskins told QP Briefing after looking over both his shoulders.

"We'll continue to push for Ontario to get its fair share, especially when we've got a Finance Minister [Oliver] saying Ontario needs to get back into balance as recently as last week. They're part of that process, and they're making decisions that are short-changing Ontario."

Oliver says Ontario is trying to have equalization both ways.

"The way it had been previously constructed was becoming unaffordable, so we made a change to tie it to economic growth, which it hadn't been before. The Liberal government of Ontario, the McGuinty government, was in favour of that change when Ontario was contributing to equalization payments. Now they're receiving payments, they may have a different view."

The changes made by the Harper government have unintended side effects the PBO also highlighted, including what it called the "beggar thy neighbour" effect: some policy changes can temporarily seem to reduce a province's fiscal capacity and thus increase the amount of money it receives in transfer payments.

For example, Quebec's decision to shut down its Gentilly-2 nuclear power plant caused a one-time decline in Hydro Quebec's dividend paid to the Quebec government. The effect of that decision, in combination with the changes made by the Harper government, saw Ontario's funding from equalization decline by $163 million according to the PBO.

Oliver denies Ottawa is short-changing Ontario

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