A prominent economic think-tank in the country is cautioning the federal government to create a “credible fiscal strategy” to address the consequences of significantly increased defense expenditures. According to a recent report by the CD Howe Institute, meeting NATO’s revised target of five percent of the gross domestic product (comprising 3.5 percent for direct military spending and 1.5 percent for defense infrastructure) represents a significant shift in the federal financial landscape.
Colin Busby, the institute’s director of policy engagement, highlighted that the combined annual defense expenditure of $150 billion is comparable to the funding Ottawa allocates for health and education transfers to provinces. To manage this, the institute suggests a modest rise in the GST, along with controlling the growth of non-defense outlays and provincial transfers.
Busby emphasized the importance of discussing this fiscal plan now, underlining its critical credibility. Prime Minister Mark Carney’s government recently announced reaching the milestone of spending two percent of GDP on defense after previously falling short of the target.
While NATO leaders set a new goal of five percent to be achieved over the next decade, Carney has argued that investments in defense, particularly dual-use technology, will yield economic benefits. However, he acknowledged potential trade-offs down the line as spending escalates, necessitating social acceptance from Canadians.
Expressing concerns about the lack of a long-term plan in the latest federal budget for managing the substantial increase in defense spending, Busby noted the absence of a five-year projection for defense spending in Finance Minister François-Philippe Champagne’s fiscal plan. The Department of National Defence (DND) has not disclosed yearly projections of the defense appropriation increase since the budget announcement.
Busby highlighted that grappling with how to fund these substantial increases is a shared challenge within the NATO alliance. He cautioned against delaying the financial discussion and resorting to debt financing, as observed in various NATO countries facing fiscal constraints.
Countries like France and Italy are anticipated to struggle with meeting the new NATO benchmark due to high public debt levels, with France ruling out tax hikes. The United Kingdom and Germany also face difficulties in defining pathways to achieve the five percent target, with London constrained by budget limitations and Berlin navigating extensive spending demands.