Canada unlikely to meet NATO commitments without significant debt accumulation

At this year’s NATO summit, held in Washington, D.C., Canada will undoubtedly face renewed pressure by our allies to increase defence spending to reach the alliance’s spending target of two per cent of gross domestic product (GDP)—a target that is increasingly viewed as the bare minimum. Despite recent increases to defence spending, the Trudeau government has yet to chart a course that gets Canada to two per cent, and it will be hard-pressed to do so without accumulating significantly more debt than what is already planned.

The days are long gone where Canada was simply one of many NATO members that failed to meet the alliance’s defence spending target, and we are now one of only eight countries that spends less than two per cent of GDP on defence. Indeed, NATO estimates we will spend 1.37 per cent of GDP on defence in 2024. Worse still, Canada is the only country that has not articulated a plan to reach that target by the end of the decade.

It is because of this that Canada has faced mounting pressure from our allies to release a plan that gets us to two per cent of GDP—with a recent example being a bipartisan letter sent to Prime Minister Trudeau from 23 U.S. senators, urging him to make good on our commitment.

In the face of this pressure, the Trudeau government recently released an updated defence policy, which commits an additional $8.1 billion over the next five years and $73.0 billion over the next 20 years, towards national defence. As a result of these new commitments it’s expected that Canada will spend 1.76 per cent of GDP on defence by 2029/30, which gets us closer to the NATO target but still ultimately falls short.

The problem facing the federal government is that, due to its own failures to responsibly manage the nation’s finances, Canada is currently in a weak fiscal position from which to increase defence spending.

During its time in office, the Trudeau government has demonstrated a complete lack of discipline regarding federal spending and debt accumulation. From 2015/16 to 2024/25, annual federal program spending (total spending minus debt charges) is expected to have increased nominally by $210 billion (76.7 per cent), which has resulted in ten consecutive budgetary deficits. These deficits have contributed to a $986.9 billion (89.4 per cent) increase in federal gross debt during the Trudeau government’s tenure.

It’s worth noting that the large majority of federal spending increases have gone towards programs and services other than national defence. Of the $210 billion in new annual spending since 2015, just 8.1 per cent ($17.1 billion) went to the defence budget.

Based on the latest federal budget, Canadians can expect much of the same fiscal mismanagement in the years to come. Indeed, over the next four years the Trudeau government plans to run deficits averaging $29.1 billion and accumulate an additional $400.1 billion in gross debt.

Due to the poor state of federal finances, the Trudeau government has little to no fiscal room with which to increase defence spending—unless of course, it chooses to fund new spending entirely using debt or cut spending in other areas. The government has already chosen the former to pay for its recent defence spending increases, given cumulative deficits from 2024/25 to 2027/28 are $44.7 billion higher in Budget 2024 than in Budget 2023, but continued debt accumulation comes at a cost to Canadians—largely in the form of high and increasing debt interest costs.

Despite recent increases, the Trudeau government still has yet to chart a course to spend two per cent of GDP on defence. But due to the government’s poor fiscal discipline, it will be hard-pressed to reach the target without significant debt accumulation.