Nova Scotia Premier Rodney MacDonald says Ottawa is casting a "dark shadow" over Canada, accusing the Conservative government of breaking a promise by tearing up the province's offshore accord.

Finance minister Jim Flaherty, seen here in Quebec, told a Senate committee in Ottawa on Tuesday that the equalization formula in the budget is a "principled, predictable, long-term formula."
(Tom Hanson/Canadian Press)

MacDonald appeared before the Senate's finance committee Tuesday, hours after Finance Minister Jim Flaherty told members he stood by his assertion that his last budget halted federal-provincial bickering.

Saskatchewan, Nova Scotia, and Newfoundland and Labrador are irate over the budget's failure to fully shield their oil and gas revenues from being clawed back through equalization, as originally promised by Prime Minister Stephen Harper.

Saskatchewan is preparing a constitutional challenge. The province is expected to release the basis of the challenge on Wednesday.

"The federal government’s efforts to tear up the 2005 Canada/Nova Scotia accord are not only extremely harmful to Nova Scotia, they do great damage to the reputation of the Parliament of Canada," said MacDonald, who wants the Liberal-dominated Senate to amend the budget. 

"They fuel public cynicism, create regional divides, and they cast a dark shadow over the future of our federation."

MacDonald, a Conservative, argued that a section of the budget strips a clause from the accord that guarantees there will be no clawback of equalization benefits at any time.

He said Harper and his government have betrayed Nova Scotia, which stands to lose millions of dollars under the budget.

"How can the average Canadian, any other level of government or any other country for that matter trust the government of Canada to keep its word when signed contracts can be so easily dismissed and disposed of?" he asked.

MacDonald, who appeared with Nova Scotia Finance Minister Michael Baker, presented an amendment that protects the province's offshore accord from changes, thus ensuring his province reaps the full benefit of its offshore oil and gas resources.

The Conservatives want to include half of the revenues from non-renewable resources when formulating equalization payments, something Nova Scotia and Newfoundland oppose.

Claim that accord unchanged is 'codswallop': Crosbie

Former federal finance minister John Crosbie, a Newfoundlander, addressed the Senate a few hours later. While he said he still supports the federal Conservatives, Crosbie said he can't pretend he's not disappointed.

"I'm not going to accept any codswallop that says that [the accord] hasn't been changed. I mean, we're not that stupid. The public isn't that stupid," he said.

Crosbie said he is upset by claims that Nova Scotia and Newfoundland and Labrador are trying to have it all when they ask to receive equalization payments but have their oil and gas revenues protected.

"We are not going to have our cake and eat it too," Crosbie said. "We haven't had the frigging cake yet."

Flaherty says he has no regrets

Earlier, Flaherty said he has no regrets about declaring in his March budget speech that "the long, tiring, unproductive era of bickering between the provincial and federal governments is over."

He said his government has achieved "a major accomplishment," setting up a "principled, predictable, long-term formula" for equalization. And while a few provinces have "some discomfort" with the reforms, he noted that most are supportive.

The budget passed the House of Commons last week and is being examined by the Senate finance committee. The Senate will ultimately decide if the budget passes, needs to be amended or is rejected.

Flaherty said he didn't believe the original accords with Nova Scotia and with Newfoundland and Labrador are separate economic development agreements.

Disagree about nature of pacts

Liberal Senator William Rompkey said the Atlantic accords are no different from Ottawa's auto pact with Ontario, funding of Quebec's aerospace industry and past deals with Alberta allowing it to receive equalization while its oil and gas industries developed.

"Does the minister fundamentally agree that these are economic development agreements with the provinces?" asked Rompkey, who is from Newfoundland and Labrador.

"No," said Flaherty.

"Then it's clear we have not much to discuss," said Rompkey.

Flaherty said the federal equalization program is "not about lifting the fiscal capacity of a receiving province above that of a non-receiving province," but is intended to ensure provinces can deliver comparable access to basic public services.

Rompkey said that until Newfoundland and Labrador can work its way out of debt, it will never be able to financially contribute to the rest of the country.

"These are non-renewable resources that will run out. This is an opportunity for us. We either grab this life preserver now or we're stuck," he said.

Flaherty said provinces with natural resources, such as Alberta and Newfoundland and Labrador, have bright economic futures because of rising commodity prices and the rising dollar. Provinces heavily dependent on manufacturing, such as Quebec and Ontario, are feeling economic stress, he said.

"As finance minister of all Canada, I have to be sensitive to trends and ensure transfers are fair to all provinces," he said. "I must ensure that the pie is distributed fairly in a way that is of maximum, long-term benefit to Canadians."

With files from the Canadian Press