NATO's two per cent spending target — where it came from, what it means

There was a time when NATO wasn't preoccupied with percentages. 

In fact, for almost the first quarter century of its existence, the western alliance's annual publication of defence expenditures amounted to a one-page spreadsheet which listed, without comment or qualifications, the defence budgets of its handful of members. (Today it is a multi-page, multi-metric, multi-chart extravaganza.)

These days, those figures have political consequences. Witness the blast that followed this week's Washington Post story reporting that Prime Minister Justin Trudeau told NATO allies that Canada will not meet the alliance's benchmark of spending two per cent of its gross domestic product on defence.

But where did that benchmark come from? How meaningful is it? And what would it cost Canada to meet it?

The last question is somewhat easy to answer.

The Parliamentary Budget Office took a stab at it in a June 2022 report. The PBO said that under the current plan, Canada's military expenditures are set to rise to $51 billion by 2026-27. To achieve the NATO two per cent target, the PBO said, "the Government of Canada would need to spend an additional $18.2 billion."

That would mean an annual defence budget of almost $70 billion. (Whether the Department of National Defence has the capacity to spend that amount of money is another, separate question.)

According to the NATO archive, it was 1974 when the alliance began tracking member nations' defence spending as a percentage of their economies.

The chart for that year looks back at the four years previous to 1970, when Canada's military spending compared to its economic output was at its zenith — 2.7 per cent of GDP.

Better than Luxembourg

NATO went back and refined the estimates in later years. But for Canada's defence budget as a percentage of GDP, it was all downhill after 1970.

The mid-to-late 1970s was the era of detente, a hopeful time that came to a crashing end with the Soviet Union's invasion of Afghanistan in 1979, which ushered in some of the coldest moments of the late Cold War era. (Canada's contribution ticked upwards from 1.8 per cent of GDP in 1979 to 2.3 per cent in 1986).

But during those years, nobody at NATO was talking about a defined spending target — a floor, a ceiling or anything else.

Still, Canada was lagging behind its allies in defence spending almost a half a century ago. In 1974, Canada spent an estimated 2.4 percent of its GDP on the military. That placed it second from the bottom among 14 NATO members, ahead of Luxembourg and just behind the Netherlands.

The 1990s and the dissolution of the Soviet Union saw those numbers fall off a cliff. Defence budgets were gutted and Canada was spending about 1.2 per cent of GDP on defence — which is where roughly where the defence budget stands today. 

The events of 9/11 and the Afghan war ushered in a new era of American impatience with Canada's military spending. The sense in Washington was that allies were reaping the rewards of the so-called "peace dividend" while the United States continued to shoulder the lion's share of defence spending for the western world.

In 1999, NATO launched the Defense Capabilities Initiative, which — as the U.S. Congressional Research Service noted in a 2007 report — was meant "to prepare the alliance to meet emerging security challenges that may require a variety of types of missions, both within and beyond NATO territory." 

The thinking, according to the initiative, was that NATO "must ensure that its troops have the appropriate equipment, supplies, transport, communications, and training."

That gave birth in November 2002 to the Prague Capabilities Commitment (PCC), so named for the city where NATO leaders agreed to (you guessed it) set down a budget benchmark for member states.

The 'peace dividend' gets overdrawn

The "PCC is drafted to extract specific, quantifiable commitments from member states," a U.S. analysis said.

But an attempt by the administration of then-U.S. president George W. Bush to make the target mandatory failed, according to a research paper written for Germany's federal security academy in 2019.

Consequently, the two per cent target has been, throughout most of its existence, more of a suggestion than an actual target. Many countries, Canada included, largely ignore it.

It was 2006 before the precise pledge figure was first mentioned in a NATO document (at the Ministerial Guidance of the Defence Planning Committee).

"Although the target is not mentioned in the summit declaration of the 2006 NATO summit in Riga, the heads of state and government made an oral pledge even then," researcher Karl-Heniz Kamp wrote in a German academy policy paper entitled Myths Surrounding the Two Per Cent Debate: On NATO defence spending.

All that changed in 2014 with Russia's invasion of Crimea. At the NATO summit in Wales in 2014, the alliance communique said that NATO members whose contribution was below two per cent "must move towards it" over the next decade — by next year, in other words. At the time, Canada was spending only 0.9 percent of its GDP on defence.

The less-than-precise compromise language of the communique was a sign of how furious the closed-door debate among NATO members was at the time, and how many NATO members — including Canada — lacked a plan to meet the target.

The pressure only increased when Donald Trump was elected U.S. president. He famously quipped (threatened) to not defend countries that didn't meet the two per cent target. 

Even though it is not binding and there are no penalties, Kamp argued that the benchmark has taken on a life of its own.

"NATO has agreed on this criterion, which has over the years turned the two per cent into a political number, repeatedly confirmed by all allies," Kamp wrote. "Hence, the two per cent target has developed a politically binding effect, even if it cannot be legally enforced.

"To reject it today as unsuitable almost inevitably results in criticism, especially after it has been reaffirmed so many times."

There are those, however, who argue that the target is a flawed, false metric. They point to how the economies of many NATO member states went into the tank during the pandemic — artificially inflating the impact of defence spending.

"Tying spending measures to GDP comes with enormous downside risk," said an October 2020 report by the Atlantic Council, a Washington-based think tank.

"This fact was borne out pre-pandemic by Greece, whose ability to surpass the two per cent threshold — in 2019, Greece spent 2.28 percent of its GDP on defence — was tied to its absence of economic growth and its high spending in areas like personnel."