Defence spending as a share of economy set to shrink as economy booms

The red-hot Canadian economy is throwing many of the Liberal government's carefully-crafted defence spending projections out the window, a recently-released Parliamentary Budget Office analysis shows.

Prior to the release of the government's defence policy last spring, Canada was under enormous pressure, notably by U.S. President Donald Trump, to meet the NATO benchmark of setting aside two per cent of the gross domestic product for spending in the military.

A 20-year plan meant to provide stable defence funding released by Defence Minister Harjit Sajjan set the more modest goal of hitting 1.4 per cent of GDP by 2024.

But earlier this month the budget office, in an evaluation of the fiscal impact of supplementary appropriations in this year's federal budget, disputes that projection. It says Canada will not hit that target and the numbers will fall off a cliff before the defence-spending policy reaches its halfway mark.

"Measured as a share of the economy, the new spending plan will raise the defence budget by over 17 per cent to about 1.1 percentage points of GDP by 2024," the analysis said. "Following this, spending will decline by 38 per cent to 0.69 percentage points of GDP by 2035."

The budget officer did say that "nevertheless, this remains a significant spending increase over the previous defence strategy."

The Liberals have repeatedly touted that their defence policy, released in June, has been rigorously costed and is affordable over the next two decades.

Defence analyst Dave Perry says one reason the numbers are out whack is that the economy is doing better than the federal number-crunchers expected when the policy was written.

The economy expanded at an annualized rate of 4.5 per cent between April and June this year, beating expectations and the consensus forecast of economists, who had only predicted 3.7 per cent growth. The ink has been barely dry on the defence policy's numbers and promises, said Perry, who noted the budget office's projected decline is "pretty eye-catching."

He said it could force the Liberals to re-evaluate their long-term spending plans.

Whether they would be prepared to commit to further increases in defence spending down the road remains to be seen, he said.

"I think anyone who pays attention to what we spend as a portion of GDP needs to pay more attention to what we actually spend and what we execute on, than what the plans are," said Perry, of the Canadian Global Affairs Institute. "Past history of a couple of different governments, including this one, have shown there to be a big gulf between plans and actual spending."

Defence Minister Harjit Sajjan was called upon Monday to champion the government's spending plans and insisted the numbers are good.  

"When we conducted our defence policy review, Canadians told us to make sure we look after our Canadian Armed Forces, that we make sure that they are well funded," he told the House of Commons. "With our new defence policy, we have, probably, the most well-funded defence policy since World War Two."

Bills coming due

He said the government is committed to "making sure that our women and men are looked after for the near future."

To the government's credit, Perry said, it did its homework and linked economic and budget projections to defence policy.

The economy, however, is a moving target.

Perry noted that the budget office's projected decline of military spending as a percentage of GDP, in the mid-2020s, comes at the same time as the bills come due for sorely needed new equipment, such as frigates and fighter jets.

"They are already coming in behind the eight ball on some of those projects," which have been delayed, he said. "We'll have to see how this all shakes out."