Canada's Military Spending: A Race Against Time

Canada is in a race against time to bolster its military spending to meet NATO's 2% GDP target. The pressure from the Trump administration has been a significant catalyst, pushing Canada to accelerate its defence investments. This move is not just about meeting international obligations; it's about securing Canada's future in an increasingly uncertain world.

The Trump administration's demands have been clear: meet the 2% target by June 2022. Experts have called this goal "impossible" and "not realistic," given the substantial increase in defence spending required. Stephen Saideman, the Paterson Chair of International Affairs at Carleton University, highlighted the challenge: "You’re talking about increasing our defence spending by almost 50 per cent. We simply cannot spend that much money that quickly."

Despite the challenges, Canada has committed to meeting the 2% target by 2032. The defence policy, Our North Strong and Free: A Renewed Vision for Canada’s Defence (ONSAF), released in April 2024, outlines a plan to increase military spending to 1.76% of GDP by 2029-30. This is a significant step, but it's just the beginning. The government has yet to detail how it will further increase spending to reach the 2% target by 2032.

The economic implications of this rapid increase in military expenditure are profound. It could lead to budget deficits, spending cuts, or increased revenues, such as tax hikes. Kevin Page, a former parliamentary budget officer, suggested that raising the necessary funds to hit the 2% NATO target quickly would require "some combination" of budget deficits, spending cuts, and increase in revenues. He also pointed out that a one per cent increase in the GST would generate about $10 billion, and that another $10 billion in savings could be found and reallocated to defence from the "substantially" higher government program spending under the Liberals.

The shift in resources away from other sectors of the economy is another concern. The parliamentary budget officer (PBO) calculated that defence spending would have to reach $81.9 billion to reach two per cent of what it projects GDP to be by 2032. This increase requires a rapid escalation in expenditures following the conclusion of ONSAF in 2029-30, when spending levels are forecasted to reach only $57.8 billion. This could potentially lead to a reduction in spending on other government programs, such as healthcare, education, or infrastructure, which could have negative impacts on those sectors.

The debt-to-GDP ratio is another area of concern. While the baseline scenario, aligned with the PBO’s October 2024 Economic and Fiscal Outlook, projects a steady decline starting from 2024-25, the hypothetical scenario maintains a similar downward trend, with the debt-to-GDP ratio reaching 38.2% by 2032-33, slightly above the baseline forecast of 36.6%. However, the hypothetical scenario poses challenges to achieving the government’s deficit-to-GDP fiscal objective. The baseline forecast anticipates the deficit-to-GDP ratio will fall below 1% in 2026-27 and continue to decline in the subsequent years. In contrast, the hypothetical scenario shows a deficit-to-GDP ratio that only decreases to 1.08% in 2026-27, failing to meet the target. While the ratio eventually drops below 1% two years later, it begins rising in the final years of the projection, again exceeding 1% in 2032-33 due to the intensified spending required to bridge the 0.42 percentage point gap in military spending-to-GDP left after ONSAF’s conclusion.

In summary, Canada's rush to fund its neglected military is a complex issue with significant economic implications. The pressure from the Trump administration has been a catalyst, but the real challenge lies in balancing defence spending with other economic priorities. The government's commitment to meeting the 2% target by 2032 is a step in the right direction, but it will require careful planning and execution to avoid negative impacts on other sectors of the economy.