Direct spending on the Canadian military is projected to reach $163.6 billion by 2035 as part of the Liberal government’s plan to meet NATO’s target of five percent of GDP, as per the Parliamentary Budget Office’s announcement on Tuesday. However, uncertainties persist that could impact government finances in the future, the fiscal watchdog stated in a recent report.
The report, authored by PBO researchers, emphasized that fulfilling Canada’s defense commitments will necessitate substantial increases in government spending and investment, with significant implications for economic activity, industrial capacity, and production composition in the country. Due to the federal government’s use of an accrual method for calculating defense expenditures, the estimated impact would result in a $63.7 billion rise in the budgetary deficit, equivalent to 1.4 percent of GDP, according to the PBO.
The potential fiscal challenges ahead will be contingent on Prime Minister Mark Carney’s administration’s handling of the surge in spending. The PBO outlined two scenarios: one involving a gradual, consistent rise in equipment procurement and another where acquisitions are delayed.
Under both the administrations of Justin Trudeau and Stephen Harper, it became customary to defer major equipment purchases. Funds from some items were rescheduled to future years, while in other instances, unspent funds were returned to the federal treasury.
In a previous report, the PBO identified over $18 billion allocated for military spending that lapsed during the Trudeau government’s term. Consequently, Carney initiated a $9 billion injection into defense last year to meet NATO’s previous spending target of two percent of GDP. The new objective of five percent of GDP—comprising 3.5 percent for direct military spending and 1.5 percent for defense infrastructure—is set to be phased in gradually over the next ten years.
Carney has articulated his intention for Canada to achieve a four percent defense spending target—2.5 percent for direct military expenses and 1.5 percent for defense infrastructure—by 2030.
During her appearance before the House of Commons defense committee, Parliamentary Budget Officer Annette Ryan, who assumed the role in the spring, shared that the government’s strategy to achieve the new target post-2030 is still evolving. She highlighted that it will take time to observe the full impact of these investments and mentioned that the PBO is in the process of modeling the potential economic repercussions of the substantial increase in defense spending on federal finances and the Canadian economy.
Ryan underscored the rapid nature of the spending surge and the associated procurement risks. She also expressed concerns about Canada’s industrial capacity potentially struggling to meet the demand and questioned the returns on investments in industrial and technological purchases. Ryan emphasized the presence of several risks linked to the significant financial outlays.
