Everyone agrees Canada should spend more on defence. How do we pay for it?
The provinces calling for higher defence spending might not like where Ottawa finds the money
If there's one thing Canada's premiers have always agreed on, it's that the federal government needs to respect provincial jurisdiction.
If there's a second thing they now agree on, it's that (notwithstanding their belief that governments should mind their own business) the federal government should spend substantially more on national defence — not least because doing so might appease the incoming president of the United States.
"He wants us to meet our 2 per cent NATO spending commitment," Alberta Premier Danielle Smith said in an interview with the CBC's Power & Politics on Tuesday, referring to Donald Trump.
"If Canada is not upholding our obligation, in terms of what we invest in the Canadian Armed Forces, the Trump administration is going to use that as something to hit us over the head with in the trade conversation," Manitoba Premier Wab Kinew said.
"I think that will be a really big thing to show that we're serious about what their concerns are," Prince Edward Island Premier Dennis King said.
However much the premiers might be straying from their own lane, these calls add to a quickly growing consensus that Canada needs to spend more on its military and defence.
"Nobody has to argue with me that we need to spend more money," Defence Minister Bill Blair said on Monday.
That same day, the Business Council of Canada, which represents some of this country's largest companies, called on the government to aim beyond the NATO target while "investing in a strong and sovereign defence industrial base."
Even if the NATO target is somewhat arbitrary, there are good arguments for increasing defence spending — beyond the fact that doing so might strengthen Canada's arguments with the United States and appease the president-elect.
But this consensus on the need to spend more on defence still leaves a rather significant question unanswered: How should the federal government pay for it?
Every conversation about defence spending has to include some mention of Canada's long-standing procurement challenges — boosting defence spending is not a matter of sending the minister over to Canadian Tire to pick up a few tanks. But even if the federal government can get better at spending money, it will still have to make allowances for a much bigger defence budget.
The parliamentary budget officer recently estimated that the federal government's projected defence spending in the current fiscal year — $41 billion — would be equal to 1.35 per cent of GDP. Going forward, the federal government sees defence spending rising to $57.8 billion in 2029, which the PBO believes will be equal to 1.58 per cent of GDP.
Getting to two per cent of GDP in 2032 would require increasing the defence budget to $81.9 billion, according to the PBO's analysis. But the Business Council of Canada argues the federal government should aim for at least 2.5 per cent of GDP — which, in the council's estimation, would require a defence budget of $110 billion in 2034.
However necessary, valuable or wise such spending would be, those are not small numbers.
What should Ottawa cut?
The Business Council suggests the federal government could take a number of steps to get to 2.5 per cent. First, it said, the government could spend "strategically" in hopes of boosting economic growth, which would in turn lead to higher tax revenues. Second, it could "re-target" some funding currently committed to research, infrastructure and promoting the development of critical minerals in order for those funds to also count as defence spending.
Finally, the council suggests, the government can go looking to cut existing spending — maybe a lot of it.
"The Government of Canada can immediately commit to a comprehensive review of its current programming, like the one initiated by the [Jean] Chrétien government in 1995 or the one launched by the [Stephen] Harper government in 2011," the council suggests.
"For context, the 1995 program review generated $29 billion in savings over a three-year period. If that program review were to occur today, at a time when federal spending is 70 per cent greater than 1995 levels, it could generate nearly $90 billion in savings over three years."
The current federal government has embarked on an initiative to find $15 billion in savings, but the Chretien government is the standard bearer for frugality.
Ironically, though, the savings announced in the 1995 federal budget included a cut of $1.6 billion in defence spending — which came on top of a cut announced a year earlier. According to information compiled by Our World in Data, Canada's defence spending fell from 1.9 per cent of GDP in 1992 to 0.8 per cent in 1999.
Another $7 billion was cut from federal transfers to provinces to support education, health care and social assistance programs. Federal transfers to provinces and other levels of government ultimately fell from $26.9 billion in 1993 to $20.5 billion in 1997.
Would any of the premiers now calling for Canada to meet its NATO target be willing to volunteer for similar cuts?
The Chretien government's efforts to balance the federal budget are generally spoken of in laudatory terms, but that praise is not unanimous and it should not be assumed that the cuts were painless or without lasting impacts.
While it wasn't part of the 1995 cuts, one of things sacrificed as the federal government turned toward austerity in the 1990s was federal investment in affordable housing. Viewed from 2024, that looks like a mistake. How much better off would Canada's housing supply be now if the federal government had continued building homes?
Higher defence spending could mean tough choices
Notably absent from the parade lining up behind the NATO target is Pierre Poilievre. While the Conservative leader has spoken about increasing funding for the military, he has not gone so far as to say he would raise the defence budget to two per cent of GDP.
It's not hard to imagine why Poilievre might be reluctant to account for that kind of commitment in an election campaign platform. He already has promised to reduce taxes and balance the budget — accounting for those commitments will require identifying cuts in spending. A significant boost in military spending obviously would have to be offset by further reductions.
Of course, an increase in defence spending also could be covered, to some extent, by borrowing (continuing to run a deficit) or raising taxes — the 1995 budget included an increase in the federal gas tax of 1.5 cents per litre.
Raising the corporate tax rate by three percentage points — from 15 per cent to 18 per cent — could generate more than $9 billion in annual revenue for the federal government. Increasing the GST from five per cent to six per cent might add another $10 billion.
As a share of GDP, federal revenues have increased since Justin Trudeau's Liberals came to office — but they are still below where they were as recently as the late 90s.
"This is not a choice anymore," Goldy Hyder, the president of the Business Council, told the CBC's Power & Politics this week, speaking of the need to boost defence spending.
That might be broadly true — or at least highly defensible. In addition to the value of satisfying our closest allies — including our largest trading partner — and making Canada a more useful contributor to global security, increasing defence spending might be justified as a necessary response to a world that is more dangerous than it has been in decades.
But even if everyone agrees on all of the above, there are still important and consequential choices to be made.
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