OTTAWA — The federal government is promising the most sweeping overhaul to date of the 47-year-old equalization program in an effort to guarantee provinces more stable annual funding.

The multi-billion dollar program, aimed at evening out regional economic disparities, is up for review at a first ministers conference Tuesday in Ottawa.

Prime Minister Paul Martin has agreed to a 3.5-per-cent annual increase in transfers under a series of reforms whose total value Ottawa pegs at $28 billion over 10 years.

"I think it's important to understand the magnitude of the improvement here," Finance Minister Ralph Goodale said last week.

"I think, quite frankly, this is a good offer and it is indeed the very best proposal with respect to equalization that has ever been put on the table."

Tuesday's meeting was agreed to last month, when the premiers decided to put off a potentially divisive debate on equalization that could have fractured their united front in earlier talks with Martin on health care.

At the last meeting, they eventually struck a deal that will see the feds pump $41 billion into medicare over 10 years.

The proposed $28 billion for equalization would be added on top.

But suggestions of federal beneficence are downplayed by the eight provinces that receive equalization -- all except Alberta and Ontario. They say the fund would have eventually grown by billions under the old formula anyway, and the $28 billion offered by Martin is no federal gift.

The equalization fund grew steadily from $4.87 billion in 1982 to almost $11 billion in 2000 -- before dropping to $8.9 billion this year.

The proposed changes are designed to prevent such surprise setbacks by boosting transfer levels to $10 billion this year, $10.9 billion next year, and installing a 3.5-per-cent annual escalator thereafter.

The federal government also proposes to convene a panel of experts to implement a new approach by 2006-07 on how to distribute the money among the provinces.

And that's where the trouble lies.

There is unlikely to be the same kind of interprovincial harmony that marked September's health summit, because this time the premiers will be scrapping for cash among themselves, not just against Ottawa.

"The interests are divergent among the provinces," said Quebec Premier Jean Charest. "We don't all have the same interests. So from the beginning, we are going to have different points of view."

Figuring out the formula

Equalization hinges on a complex formula that sets a national standard for provincial wealth by calculating the fiscal capacity of five provinces -- B.C., Saskatchewan, Manitoba, Ontario and Quebec.

All provinces but Alberta and Ontario currently measure below that standard, making them eligible for the equalization transfers to help them offer comparable services at similar tax rates.

Disagreements between the provinces hinge on seemingly subtle changes that can affect provincial budgets by hundreds of milions of dollars.

Already there is discord between some of the more populous have-not provinces, including Manitoba and Quebec, and the poorest ones, including Nova Scotia and Newfoundland.

Some of the bigger provinces argue for an equalization revision based on the overall need in each province, but even within that group there are diverging interests.

"That's just simply not acceptable. It's a non-starter," B.C. Finance Minister Gary Collins said of the proposal put forward by some of the larger have-not provinces.

"It will not be something we even discuss with them, other than to say that is not on the table as far as we are concerned, at all."

Then there are Nova Scotia and Newfoundland, which hope to walk away with deals to help boost their relatively weak economies.

They want the federal Liberals to make good on an election promise to exempt their offshore oil and gas revenues from the overall equalization calculation.

John Efford, the federal natural resources minister and a Newfoundlander, claimed late last week that a deal with his home province was all but signed.

That was contradicted by Loyola Sullivan, the provincial finance minister, who said the two sides were at an impasse and accused Ottawa of reneging on past commitments.

Nova Scotia Premier John Hamm, or his part, says pre-meeting talks have gone well, and he expects the needs of all the provinces receiving eqaulization payments can be met.

"The file is moving forward, and I would anticipate we'll have a reasonable result of the meeting," said Hamm.