Canada can’t meet NATO spending target without serious fiscal consequences

Next week, the 30 member countries of NATO will meet in Lithuania to discuss their defence spending commitments. Canada has fallen short of the organization’s required spending target for decades and the U.S. ambassador to NATO plans to ask Canada and other member countries to outline a plan for how they will meet the targets in 2024. There’s simply no way Canada will meet this target without taking on significantly more federal debt than is already planned.

In recent years, the federal government has significantly increased program spending, which (after adjusting for inflation) has climbed from $8,980 per person in 2014 to $11,518 in 2022—an increase of 28.3 per cent. With this heightened spending, most of Ottawa’s focus has shifted from core government functions such as defence and justice to expanding or implementing new programs such as $10-a-day daycare, national dental care and the Canada Child Benefit.

And of course, this large increase in federal spending has produced persistent deficits and substantial debt accumulation. After recording eight consecutive deficits, the Trudeau government plans to run at least five more (including a $40.1 billion deficit this year) with more than $100 billion in additional debt by 2027/28.

And yet, despite all this borrowing, Canada continues to fall short of its NATO spending commitments.

Nearly two decades ago, NATO members agreed to, at minimum, record annual defence spending equivalent to 2 per cent of GDP. Since then, however, most member countries including Canada have failed to uphold this promise. Only the United States and six other NATO member countries exceeded this spending target in 2022.

According to NATO’s latest annual report, Canada will spend an estimated 1.3 per cent of its GDP on the military in 2022—well below the 2 per cent target and ahead of only four NATO countries (Slovenia, Belgium, Spain and Luxembourg).

But pressure is mounting on Canada and other member countries to step up. NATO’s secretary general recently said he expects allies to “regard 2 per cent of GDP for defence not as a ceiling but a floor, a minimum, that we should all meet.” And the U.S. ambassador to NATO expects Canada to meet the two per cent spending target sooner rather than later.

For Canada to meet the target, according to the Parliamentary Budget Officer, Ottawa would need to spend an additional $14.5 billion on annual defence spending in 2024/25. This would increase next year’s deficit by 41.4 per cent while adding more debt and driving up debt interest costs.

Clearly, there’s no way for Canada to meet its NATO spending commitment without blowing through any sense of a deficit or debt target. Put differently, the federal government is unable to meet the demands of its allies without seriously weakening its fiscal position unless it’s finally willing to prioritize such spending over other currently favoured federal initiatives and programs.

When it comes to meeting our international obligations for military spending, poor management of federal finances and suspect prioritization of spending have put Canada between a rock and a hard place.