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Finance Minister Joe Oliver addresses a Vancouver Board of Trade luncheon in Vancouver, B.C., on Thursday April 24, 2014.DARRYL DYCK/The Canadian Press

Finance Minister Joe Oliver says Canada's economy is being smothered by the budgetary excesses of the country's two largest provinces.

Ontario and Quebec must start reining in their deficits for the well-being of the rest of the country, Mr. Oliver said Monday in Montreal.

"Canada cannot achieve its full potential if its biggest provinces are lagging economically," Mr. Oliver told reporters following a speech in Montreal to the International Economic Forum of the Americas. "You just have look at the numbers."

Mr. Oliver said both provinces face the risk of possible downgrades by debt rating agencies, and that could push up borrowing costs and make their fiscal situations worse.

"I do believe the Canadian provinces need to look at their fiscal policies and move towards a budgetary surplus," he said.

Mr. Oliver's comments reignite the debate over Canada's two-speed economy. High energy prices and billions in new oil sands investments have been a boon for Western Canada, where the economy is strong and government finances are improving.

Canada's manufacturing heartland of Ontario and Quebec, on the other hand, has suffered since the recession.

Non-energy exports are still below their pre-recession level in spite of the recent decline in the Canadian dollar. That has slowed the economic recovery, making it more difficult for the provinces to eliminate their deficits.

He applauded Quebec's commitment in last week's budget to curtail government spending and urged Ontario to follow suit. Wading into the Ontario election, Mr. Oliver said "whoever" wins next week's Ontario election must "make a serious commitment to growth and a balanced budget."

Ontario, however, appears headed in the other direction. The province is projecting a deficit of $12.5-billion this year – 25 per cent higher than forecast.

The finance minister, who is due to speak to investors in New York later this week, didn't offer specific suggestions for how Ontario and Quebec can escape their fiscal mess. But he suggested both provinces must get back to a financial situation that's "friendly to business, that permits individuals to spend and invest, [and that] is going to encourage economic development."

The finance minister also prodded other countries to follow Canada's federal government in balancing their budgets. Canada is on track to post a $6-billion surplus in 2015-16.

Mr. Oliver said an eventual rise in interest rates and potential downgrades by credit rating agencies present an "inescapable mathematical calculation" – higher debt payments.

And that could put pressure on the government's ability to deliver services. He said deficits are a "drag on economic growth and a diversion of resources that could be used for investment or social programs."

And Mr. Oliver dismissed concerns that aggressive budget cutting – such as that proposed by Ontario Progressive Conservative Leader Tim Hudak – would derail the weak Canadian economic recovery.

"I don't think acting responsibly is going to constitute a drag," he said.

Follow Barrie McKenna on Twitter: @barriemckennaOpens in a new window

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