Fiscal Watchdog Projects Soaring Deficits from Defence Spending Targets
Canada's Parliamentary Budget Officer has issued a stark warning about the fiscal implications of the government's commitment to increase defence spending to meet NATO targets. According to a new report, this pledge could dramatically increase federal deficits over the next decade, adding significant pressure to the country's already substantial debt burden.
Defence Spending Projections and Fiscal Impact
Interim Parliamentary Budget Officer Jason Jacques released a report on Thursday detailing how the Carney government's commitment to boost defence spending to at least 5 percent of gross domestic product (GDP) would affect federal finances. The analysis projects that this spending increase would gradually escalate over the coming decade, eventually adding approximately $63 billion annually to the federal deficit by the 2035-36 fiscal year.
The fiscal impact would begin modestly, with only about $3 billion added to the deficit during the 2026-27 fiscal year. However, the cumulative effect would become increasingly substantial as the government works toward meeting its NATO commitment. The PBO estimates that this additional defence spending would eventually increase the federal debt-to-GDP ratio by 6.3 percentage points by 2035.
NATO Commitment and Government Plans
The government's defence spending commitment originated during the NATO Leaders' Summit in The Hague, Netherlands, last June. Prime Minister Carney pledged to increase defence spending to at least 5 percent of GDP by 2035. This target includes 3.5 percent of GDP for core defence spending and an additional 1.5 percent for ancillary defence and security measures, such as infrastructure and innovation projects that could also serve non-military or economic purposes.
The government has stated that its defence spending will "put Canada on a pathway" to meet this NATO commitment, representing a substantial increase for a country that has historically spent well below the previous NATO threshold of 2 percent of GDP on defence. Over the past nine months, the Carney government has already increased defence spending, with projections indicating Canada will reach the 2 percent threshold this year or next.
Current Fiscal Context and Debt Concerns
The PBO's warning comes against a backdrop of already challenging fiscal circumstances. In its first budget last fall, the Carney government projected a deficit of $78.3 billion for the current fiscal year, marking the third-highest deficit in Canadian history and the largest ever recorded during a non-pandemic year. The government also forecast an average deficit of $64.3 billion between this fiscal year and 2029-30, more than double what was projected in the 2024 Fall Economic Statement.
Notably, these existing deficit projections do not include most of the additional defence spending planned to meet the NATO target. The PBO report indicates that extra spending on core defence measures alone would mean an additional $33.5 billion in annual spending over the next decade.
Canada's Growing Debt Burden
Canada's federal debt has expanded significantly in recent years, creating additional concerns about the fiscal impact of increased defence spending. The federal government has now accumulated $1.27 trillion in debt, with almost half of this total added over the last five years alone. Even without accounting for most of the additional defence spending connected to hitting the NATO target of 5 percent of GDP, Ottawa has added approximately $593 billion in debt over the last five years, representing 46.7 percent of the total debt accumulated throughout Canadian history.
The government has not yet published fiscal projections specifically affiliated with its NATO defence spending pledge, leaving the PBO report as one of the first comprehensive analyses of the potential financial implications. As Canada navigates these fiscal challenges while addressing international security commitments, the balance between defence priorities and economic stability remains a critical policy consideration for the coming decade.
