TORONTO (Reuters) - Canadian Finance Minister Jim Flaherty took the unusual step on Monday of declaring Ottawa "expects" the government of the province of Ontario to lower its corporate tax rate to stimulate the province's sluggish economy.
Flaherty made his remarks just a day before Ontario, the country's most populous and heavily industrialized province, is set to release its 2008-09 budget, and they further stoke a months-old war of words between the two governments.
"Ontario's business taxes are currently the highest in Canada," Flaherty told reporters. "Tomorrow, (Ontario Premier) Dalton McGuinty has a golden opportunity to begin turning the situation around."
Ontario, which called Flaherty's comments a "stunt," has been hit hard by the slowing U.S. economy, the strong Canadian dollar and the loss of jobs to lower-cost countries. Its manufacturers, especially in the auto and forestry sectors, rely on exports.
Flaherty -- who was Ontario's finance minister before he entered federal politics -- says he wants the province to reduce its corporate income tax rate to help spur its economy.
Last year, Ontario began reducing taxes as economic growth started to slow. But few expect the province to unveil any big tax cuts in its budget on Tuesday because its revenues are thin and it has said it will avoid going into deficit.
McGuinty and Dwight Duncan, Ontario's finance minister, say the loans that Ontario is offering the manufacturing sector are a better way to promote economic growth.
Flaherty suggested Ontario would, for the first time, become a so-called "have not" province -- the recipient of federal transfer payments -- within three years unless it took his advice.
Economists expect Ontario's gross domestic product to grow by less than 1 percent this year, which would put it at, or near, the bottom of the pack among Canada's 10 provinces.
Ontario's general corporate income tax rate is 14 percent. Combined with federal taxes, the overall tax rate is more than 30 percent. Flaherty said on Monday he'd like to see it drop to 25 percent in four years.
The Conservative federal government, which last month presented its own lean budget, also wants the Liberal Ontario government to "harmonize" its provincial sales tax with the federal consumption tax.
"Other provinces have been responsive, Ontario has not been to date," Flaherty said, adding he aims to "brand Canada ... as a low business tax jurisdiction to encourage investment."
Reporting by Jonathan Spicer; Editing by Peter Galloway