Canada Defense Promises Point to More Borrowing, Watchdog Says

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(Bloomberg) — Prime Minister Mark Carney’s surprise announcement that Canada would spend 2% of gross domestic product on defense this fiscal year is a recipe for even deeper deficits, the parliamentary budget officer said.

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And that’s before the North Atlantic Treaty Organization is set to commit to a far higher spending target at its annual summit this week. 

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“The obvious choice is borrowing more, which seems the choice that the government has made, because it’s committing to 2% of GDP allocated to defense at the same time as it’s reducing taxes,” Yves Giroux said in an interview. 

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The parliamentary budget officer projected a deficit of C$46 billion ($33 billion) in the fiscal year that ended in March. Carney’s April election platform, which promised to hit the 2% NATO target by 2030, saw the shortfall deepen to C$62.3 billion this year. 

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His accelerated plan announced two weeks ago requires C$9 billion more spending by next April. He’s delayed Canada’s budget until later this year.

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Carney wants to make government more efficient, including with artificial intelligence, but Giroux expressed doubts that such tactics could free up the requisite money in such a short time.

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“So, obviously, this will be deficit-financed. Other choices could have been reducing spending in other areas, which is not what current documents or recently tabled documents suggest.”

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A spokesperson for Canadian Finance Minister Francois-Philippe Champagne said the government remains “committed to managing public finances responsibly.”

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“By focusing investments to Canadian companies and supply chains, we’re not only strengthening our defense capacity and working towards our commitments, but we’re also supporting good jobs and long-term economic growth,” Audrey Milette said in a statement. 

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Giroux pointed out mitigating factors: Canada’s net debt-to-GDP ratio is currently lower than many other nations, including the US, and there is the “potential for positive ripple effects in the economy” from an infusion of cash into defense. If more is spent in Canada and less in the US, as Carney has promised, it could boost the industrial base and have benefits beyond military contractors, he said.

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But greater fiscal pressures await. On Tuesday, Carney will travel to the NATO summit at The Hague, where allies are expected to set a new target of 5% — with 3.5% on military spending and 1.5% on defense-related investments and infrastructure.

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Meeting that “would require a major shift of government priorities — away from social spending, for example — to free up some of the resources currently allocated to these types of expenses towards defense,” Giroux said. Or “some tax increases, for sure, or much higher deficits.”