Expect higher deficits to meet Canada’s 5% NATO defence spending target

Prime Minister Mark Carney during the NATO summit on June 25 in The Hague, Netherlands. Photo by Pierre Crom/Getty Images

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Prime Minister Mark Carney says Canada will spend five per cent of its nominal gross domestic product on defence by 2035, which economists say is a commitment that will have significant fiscal implications, including higher deficits.

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“You’re looking at deficits in the order of $70 billion to $75 billion annually over the next couple of years and then by 2035 reaching around $90 billion by the end of the forecast,” Randall Bartlett, deputy chief economist at Desjardins Group, said.

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The new target, which was pushed by United States President Donald Trump on all North Atlantic Treaty Organization (NATO) members, is split into two spending categories, with 3.5 per cent going to core defence spending and 1.5 per cent going to defence-adjacent spending, such as infrastructure.

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In an interview with CNN on Tuesday, Carney said Canada will have to annually spend $150 billion to achieve the five per cent target and that it would include significant investments in critical minerals.

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In a press conference on the sidelines of the NATO summit in The Hague, Netherlands, on Wednesday, he said the trajectory and balance of spending under this plan will be reviewed in 2029.

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Bartlett said the expected annual spending from this new commitment will be much more than the figure quoted by Carney.

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“That number is pretty much the lowest number you could put out there if you’re hitting 3.5 per cent of GDP by 2035,” he said. “In reality, it’s probably going to be larger than that, and if you take it up to five per cent, then you’re beyond $200 billion in defence and defence-adjacent spending.”

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Bartlett said he is operating with very little information from the federal government, which has not provided details on how it plans to pay for these expenditures.

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The federal government is expected to table a budget in the fall. Carney has promised to split operational and capital spending into two separate budgets, with a promise to balance the operational budget within three years.

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The Liberal Party election platform in April promised $130 billion in net new spending over four years and projected a deficit of $62.3 billion for the fiscal year 2025-2026.

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But many of the platform’s projections were based on a rosier picture of the economy. Since then, the federal government has committed to more spending, including that Canada would meet its 2014 NATO defence spending target of two per cent of GDP this fiscal year.

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Under that announcement, Carney said he would expand the security mandate of the Canadian Coast Guard (CCG) and begin the process of moving the agency under the Department of National Defence from Fisheries and Oceans Canada.

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“The plan is to spend a lot of money on defence and infrastructure, including critical minerals,” Derek Holt, an economist with the Bank of Nova Scotia, said in a note. “Other than missing parts, like how it gets implemented and what the money will be spent on, the part that’s missing is who pays for it.”