Early in its tenure, the Carney government committed to a substantial increase in defence spending over the next decade, promising allies in the North Atlantic Treaty Organization (NATO) that Canada will spend the equivalent of 5 per cent of its economy on its military by 2035. While the government has yet to map out how it will achieve this goal, a new report from the Parliamentary Budgetary Officer (PBO) suggests the commitment carries a massive price tag. For the government to keep its word, it must enact serious fiscal reform.
Since 2006, NATO has maintained a benchmark military spending target for member countries of 2 per cent of gross domestic product (GDP). Canada has long-failed to meet this benchmark and only reached it in 2025 with tens of billions in new defence spending over the next five years including, which (as outlined in the government’s new Defence Industrial Strategy) will help produce a stronger domestic defence industry. But now NATO members have agreed to raise that benchmark spending target to 5 per cent of GDP by 2035.
Importantly, this new 5 per cent commitment includes a 3.5 per cent (of GDP) target for core defence spending (i.e. military salaries, equipment, ammunition, training and more) and up to a 1.5 per cent for other defence and security-related spending (such as infrastructure that can be used for both military and civilian purposes). According to the Carney government’s current plan, it will meet this 1.5 per cent target, but there’s no detailed plan to meet the 3.5 per cent target.
But according to the new PBO report, the government must increase annual core defence spending from $63 billion in 2025/26 to $159 billion by 2035/36 to reach 3.5 per cent of GDP. In other words, the government must more than double its annual core defence budget over the next 10 years to fulfill its NATO commitment.
Due to the current state of federal finances, this is an enormous fiscal hurdle to overcome.
The Carney government plans to run deficits (meaning it will spend more than it collects in revenue) of at least $56.6 billion each year for the next five years. In other words, the government already plans to borrow hundreds of billions over the coming years just to cover spending that’s currently planned. According to the PBO, to meet the 3.5 per cent target by 2035/36, the government must borrow at least an additional $287 billion over the next 10 years (assuming it makes no cuts elsewhere in the budget).
It would be very reckless for the federal government to continue borrowing so much money and walk closer and closer to a fiscal crisis of its own making. Instead, to offset the massive price tag associated with its NATO commitments, the Carney government should enact serious fiscal reform immediately. This includes reducing spending that’s wasteful and/or outside of the federal government’s purview (e.g. corporate welfare, EV subsidies, etc. ), shrinking the deficit, and slowing the amount of debt accumulation.
Grady Munro and Jake Fuss are senior analysts at the Fraser Institute.
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