Flaherty slams Ontario Liberals' management of economy

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Federal Finance Minister Jim Flaherty took the extraordinary step on Friday of denouncing Ontario Premier Dalton McGuinty's stewardship of the economy, just one day after he unveiled his own blueprint for Canada's future prosperity.

During a speech to a business audience in Toronto, where he simultaneously defended his own budget and picked a fresh fight with Ontario, Mr. Flaherty said the McGuinty Liberals have "no one to blame but themselves" for the fact that the province is headed for six more years of deficits.

"Ontario's spending mismanagement is a problem for the entire country," Mr. Flaherty told reporters. "I would hope that they're able to manage their spending better than they have been able to do over the past eight or nine years of government."

His comments escalated the war of words between Ottawa and Ontario even as economists criticized him for a budget that contains relatively modest restraint measures. Aside from the high-profile changes to eligibility for Old Age Security, it is far from a "watershed document," said BMO Nesbitt Burns economists Douglas Porter and Robert Kavcic in a report describing the measures as "austerity lite."

And for all of his criticisms about the McGuinty government's fiscal management, Mr. Flaherty neglects to mention that the province has yet to recover from the global economic recession that led to thousands of job losses in its manufacturing heartland.

Amid those challenges, program spending in Ontario has been on par with levels in Ottawa, according to figures compiled by the Finance Ministry. Spending grew 6.5 per cent a year on average between fiscal 2006 and 2011 in Ontario, ranking it in the middle of the pack among the provinces and aligning it with federal program spending over the same period.

Mr. Flaherty has criticized the spending mismanagement in Canada's largest economy under Mr. McGuinty's watch. But the bluntness and timing of his latest attack, coming just days after Ontario tabled its plans to dig itself out of deficit, was striking nonetheless.

What his remarks have done is turn up the heat on tensions between Ottawa and Ontario at a time when there is heightened concern that the province's fiscal woes could lead to a downgrade of its credit rating.

"For a federal minister to be attacking Canada's largest province and questioning whether it should be downgraded is treasonous," said Liberal finance critic Scott Brison. "It's economic lunacy. … He's got to stop this grudge match."

The prospects of that happening any time soon do not look good. With the federal Conservatives using their majority to increase their focus on the resource sector in Western Canada to drive the country's future prosperity, tensions are building with fiscally challenged provinces in the East, notably Ontario and Quebec.

It was left to Ontario's Economic Development Minister to respond to Mr. Flaherty. Brad Duguid suggested that partisan politics were at play. The provincial Progressive Conservatives, he said, are conspiring with their federal cousins to denounce Ontario's fiscal plan.

"Coming off another bad week, Ontario's PCs called in Jim to fight Tim's battles," Mr. Duguid said in a not-so-subtle reminder that Tory Leader Tim Hudak has already denounced the provincial budget and said he plans to vote against it. "They must have concluded that Tim wasn't up to the task."

Craig Wright, chief economist for RBC, said Ontario's budget raised more questions than Ottawa's because it was not clear how the province will balance its books.

"In Ontario's case, the details weren't there in terms of the spending," he said. "Ontario kind of over-promised and under-delivered and I think the feds sort of did it the other way."

As the dust settled on the federal budget, which promises a smaller and less intrusive government and calls on individuals to take greater responsibility to finance their retirement years, bank economists were largely praising Ottawa for putting the deficit on a track to be eliminated by 2015-16 or earlier. But groups concerned about cuts were still hunting for details as to what the budget will mean.

Some of that information is expected to roll out early next week, as unions were given notice that individual public servants will start to learn then if they are among the 19,200 workers who will lose their jobs.

Nevertheless, the attacks from Mr. Flaherty, who once served as Ontario's finance minister, were met with concern by his federal critics, who say the Conservative government is mixing divisive politics with a jobs plan that relies too heavily on exporting raw natural resources.

"They seem to be attacking all over," said NDP MP Peter Julian, pointing to the fact that the Conservatives also dismiss environmentalists as "radicals" for opposing natural resources expansion plans.

Both the NDP and the Liberals are increasingly warning that Canada's hot natural resources sector risks harming other sectors of the economy, such as manufacturing in Ontario and Quebec, through a higher Canadian dollar.

"The provinces without natural-resource jobs are going to get poorer and poorer and will have fewer and fewer jobs and opportunity, less money to put in education and health care and higher levels of provincial debt," said Mr. Brison, the Liberal finance critic.

Mr. Flaherty, who was once Ontario's finance minister, took a swipe at his current provincial counterpart Dwight Duncan, saying finance ministers have a difficult task right now, but "one must deal with the situation as it is, rather than as one would wish it to be."

Mr. Flaherty singled out the province's health-care spending goals as an item that might not be realistic.

"I see in their budget, for example, that they say health care increases will grow at 2.1 per cent this year. Well, I wish them good fortune in accomplishing that goal, I think the key will be whether they're capable of implementing what they said that they would do."

Mr. Flaherty added that, as a big part of the Canadian economy, Ottawa wants Ontario to succeed.

"I wish them good fortune, but I hope that they will implement."

Mr. Flaherty's comments were in sharp contrast to the more measured response from the Ontario Premier to the federal budget.

Mr. McGuinty told reporters in Ottawa Friday morning that the federal blueprint is "taking us in the right direction." But he called on the Harper government to work with the provinces to address the fact that roughly one-third of Canadians will not have enough money during their retirement years.

"We think the best way to manage that challenge is to enhance the Canada Pension Plan," Mr. McGuinty said. "I think we're always at our best when we work together."

Mr. Duncan was more pointed in his response to the federal budget, saying making Canadians wait until they are 67 before they can begin collecting Old Age Security is going to cause "enormous" challenges for society.

The change will hit middle-income earners the hardest because they are not saving enough for their retirement and they are not eligible for the Guaranteed Income Supplement, Mr. Duncan said on Thursday.

"My fear is that the current federal government has just too easily moved off looking at enhancements to the Canada Pension Plan," he said. "Penny wise and pound foolish. That's Jim."

It was left to Ontario's Economic Development Minister, Brad Duguid, to respond directly to Mr. Flaherty on Friday. Mr. Duguid suggested that provincial Progressive Conservatives are conspiring with their federal cousins to denounce Ontario's fiscal plan. Progressive Conservative Leader Tim Hudak has already said he plans to vote against the Ontario budget.

"Coming off another bad week, Ontario's PCs called in Jim to fight Tim's battles," Mr. Duguid said in a statement. 'They must have concluded that Tim wasn't up to the task."

Tensions are escalating in the on-again, off-again relations between Ottawa and Ontario as both governments face fiscal challenges. The McGuinty government has recently revived a long list of complaints against Ottawa over its unfair treatment on everything from how much employment insurance laid off employees receive to lack of support for the province's nascent green energy sector.

Mr. Flaherty's remarks on Friday follow his pre-budget broadside last week, when he said the McGuinty government is blaming everybody else for its problems. "What we've basically seen in Ontario is eight, almost nine years of spending mismanagement," he said.