The Parliamentary Budget Office projected that Canadian military spending could rise to $163.6 billion by 2035 to meet NATO’s five per cent of GDP target, as proposed by the Liberal government. Despite this, uncertainties exist that may impact government finances in the future, according to a recent report by the fiscal watchdog.
The report emphasized that fulfilling Canada’s defence obligations would necessitate substantial increases in government expenditure 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 accounting method for defence expenditures, the projected impact could inflate the budgetary deficit by $63.7 billion, equivalent to 1.4 per cent of GDP.
The potential fiscal challenges ahead will be influenced by how Prime Minister Mark Carney’s administration manages the surge in spending. The PBO outlined two scenarios: one involving a gradual rise in new equipment procurement and another where purchases are delayed.
Under both the Trudeau and Harper governments, it became common practice to defer major equipment acquisitions, leading to funds being reallocated to later years or returned to the federal treasury. In a prior report, the PBO identified over $18 billion earmarked for military spending that lapsed during the Trudeau government’s tenure.
Last year, Carney sanctioned a $9 billion injection into defence to meet NATO’s former two per cent GDP spending target. The new objective of five per cent of GDP, comprising 3.5 per cent for direct military spending and 1.5 per cent for defence infrastructure, is set to be phased in gradually over the next decade. Carney has outlined a plan for Canada to achieve a four per cent defence spending target by 2030 – 2.5 per cent on direct military outlays and 1.5 per cent on infrastructure.
Annette Ryan, the current parliamentary budget officer, indicated to the House of Commons defence committee that the government’s strategy to reach the new spending goal post-2030 is still under development. Ryan highlighted that it will take time to gauge the full impact of these investments. The PBO has initiated efforts to model the potential economic consequences of the substantial increase in defence spending on federal finances and the Canadian economy.
Ryan cautioned about the rapid escalation in defence spending, expressing concerns about procurement risks and the capacity of Canada’s industry to meet the demand. She stressed the importance of evaluating the benefits derived from such significant investments in industrial and technological assets, citing various associated risks.