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Federal Finance Minister Jim Flaherty is “absolutely wrong” in suggesting that Ontario is in jeopardy of becoming a “have-not” province under Confederation, says Ontario Finance Minister Dwight Duncan.

Moreover, he said, Mr. Flaherty's latest attack is “demeaning” to all Ontarians and demonstrates that the Harper government has no interest in working with the province to help its struggling manufacturing sector.

“I can't figure this out,” Mr. Duncan told reporters at the provincial legislature Wednesday. “It's kind of sad to see a federal finance minister doing this. It's just not very becoming.”

Mr. Duncan was responding to the latest volley in the escalating war of words between Ottawa and the province over how best to respond to Ontario's slowing economy.

Mr. Flaherty told a Sun Media editorial board Tuesday that Canada's most populous province is on track to become a 'have-not' province in two or three years if its weakening economy is not turned around, and he placed the blame solely on Premier Dalton McGuinty.

“If this continues – this is not hyperbole, this is a fact – Ontario will become a have-not province in Confederation,” Mr. Flaherty said.

“And it will be Premier McGuinty's legacy that he in two terms took Ontario from being the strongest economic province in the federation to a have-not province.”

Rethink equalization?

Mr. Flaherty told the editorial board that the federal government would have to “rethink” the equalization formula because it was never envisioned that Ontario would one day become a recipient of payments.

Asked Wednesday about his Finance Minister's remarks, Prime Minister Stephen Harper highlighted his government's own record of tax reduction and investments in infrastructure, science and technology – policies he said have been widely praised by the business community.

“Ontario is the heart, it is still the engine of the Canadian economy,” Mr. Harper told reporters in London, Ont. “It is in our interest that Ontario be a good place to invest and we want to work with the government of Ontario to get the policies right, to get the kind of policies that we need right across the country to have success.”

Mr. Flaherty is not the first to raise the spectre of Ontario becoming a have-not province. Back in the summer of 2005, the Ontario Chamber of Commerce released a report saying Ontario faced that risk as a result of the funding shortfall between what it contributes to the federal treasury and what it receives from Ottawa.

But the notion that a province long considered one of the wealthiest would need to be propped up by the rest of the country is now being used to fuel the bitter fight between the federal and Ontario governments.

Mr. Flaherty has called on the province to kick start the economy by slashing corporate tax rates. Premier Dalton McGuinty said there is no way his government could do that without slashing spending on health care and other social programs.

'It just can't be done'

The Premier suggested to reporters Wednesday that Mr. Flaherty's latest comments were anything but thoughtful.

“I just don't think it's helpful to panic,” he said.

Following Mr. Flaherty's advice would reduce the province's revenue by $5.1-billion. This would include eliminating the annual health premium - which costs each taxpayer up to $900 a year - and cutting the corporate tax rate to 10 per cent.

“You can't take $5.1-billion out and not close hospitals and not fire nurses and not make cuts to education and not give rise to dramatic increases in tuition and not fire water inspectors and not make cuts to social assistance,” he said. “It just cant be done.”

Mr. McGuinty tried to tone down the rhetoric in his fight with Mr. Flaherty, saying the best solution would be for the two levels of government to work together — despite their differing approaches to the economy — instead of continually bashing each other.

“This recent conversation makes for good copy, but really, what do Ontarians expect of me?” asked Mr. McGuinty.

“One of the things they would appreciate is if our respective ministers of finance actually sat down together, looked for some common ground and found a way to work better together to improve the quality of this economy.”

The Premier said Mr. Harper has not responded to his letter complaining about Mr. Flaherty's earlier comments that Ontario was the last place where a new business would want to invest.

The remarks that so riled Mr. McGuinty were uttered by Mr. Flaherty in Halifax shortly after the federal budget.

While praising British Columbia and Alberta for moving to lower corporate taxes, Mr. Flaherty had strong critical words for his home province, saying Mr. McGuinty doesn't get the fact that the province must reduce taxes.

“It discourages investment in the province of Ontario,” he said. “If you're going to make a new business investment in Canada, and you're concerned about taxes, the last place you will go is the province of Ontario.”

Progressive Conservative Leader John Tory fired his own broadside at the Liberals earlier this week when he released his party's economic report card on Ontario, in the lead-up to the March 25 provincial budget.

The report cites several statistics showing that Ontario's economy is weakening in relation to the rest of the country: Ontario will rank No. 9 in economic growth among the provinces this year; its unemployment rate exceeded the national average last December for the first time in three decades; and record numbers of people are fleeing the province. In the third quarter last year, Ontario experienced a record loss of 14,720 people.

Last year alone, 64,000 manufacturing jobs vanished in Ontario, accounting for 6.5 per cent of the total. Mr. Duncan acknowledged that the sector is struggling.

"We will continue to work with those sectors and families that are facing difficulties as a result of world economic conditions today ...," he said.

With reports from Brian Laghi and Canadian Press