According to a recent report from the Parliamentary Budget Officer (PBO), Canada must significantly increase its military expenditures to meet NATO’s goal of allocating 2% of its GDP to defence by the fiscal year 2032-33. The report highlights the financial implications of this commitment and examines the sustainability of Canada’s defence budget in the context of this ambitious target.
In April 2024, the Canadian government unveiled a new defence strategy titled Our North Strong and Free: A Renewed Vision for Canada’s Defence (ONSAF), which projected that military spending would reach 1.76% of GDP by 2029-30. However, details on how the government intends to bridge the gap to the 2% target by 2032-33 have not yet been disclosed. Furthermore, the projections in the ONSAF are based on GDP estimates that the PBO deems to be flawed.
“Based on our analysis and independent GDP projections, the government’s latest military spending forecast reaches only 1.58% of GDP by 2029-30, which means military spending will have to be increased by 0.42 percentage points of GDP within the following three years to meet the target by 2032-33,” adds Mr. Giroux.
The PBO’s analysis considers a scenario where the military spending outlined in the government’s defence policy is fully implemented through the fiscal year 2029-30, followed by an increase to achieve the 2% GDP target by the end of the designated period.
“To meet Canada’s NATO spending commitment, military expenditures need to rise to $81.9 billion by 2032-33, which is nearly double the $41 billion projected for 2024-25,” says Yves Giroux, PBO.
While reaching this NATO goal would necessitate a substantial boost in defence funding, the PBO anticipates that Canada’s debt-to-GDP ratio will still experience a gradual decline, projected to be 38.2% by 2032-33, slightly above the baseline figure of 36.6%. However, the report raises concerns about the deficit-to-GDP ratio, which is projected to surpass 1% in the final years of the forecast due to the heightened military spending required to meet NATO’s standards.
In conclusion, while Canada is poised to ramp up its defence budget, the financial landscape reveals challenges that will need to be addressed to ensure fiscal sustainability alongside international commitments.