Report Urges Major Fiscal Overhaul for Canada to Meet NATO Defence Spending Target
A new report from the C.D. Howe Institute has issued a stark warning: Canada must implement significant fiscal changes, including hiking the Goods and Services Tax (GST) and cutting non-defence spending, to meet the North Atlantic Treaty Organization's (NATO) defence spending target of five per cent of gross domestic product (GDP) by 2035. This comes despite Canada achieving the current two per cent GDP target five years ahead of schedule.
"No Free Lunch" in Defence Funding
Colin Busby, co-author of the report and director of policy engagement at the think tank, emphasized the gravity of the situation. "The main message is that in order for Canada to meet its NATO and defence spending commitments, it is going to have to radically transform the way the federal government allocates funds," Busby stated. "This is going to be a major shift in its finances. There’s no free lunch. There’s no way of doing this without imposing costs and constraints somewhere in our financial structure."
The report highlights that Canada's current economic landscape—characterized by high debt levels, weak productivity, slow economic growth, and an aging population—makes it impossible to accommodate the defence spending increases promised by the Mark Carney government without broader fiscal adjustments.
Proposed Fiscal Measures
To address this challenge, the report advocates for a "mixed financing approach" that could include:
- Increasing the GST from five per cent to seven per cent.
- Adjusting provincial transfers to grow at a slower rate than GDP.
- Implementing non-defence spending restraint across multiple areas to avoid overburdening any single program.
According to the analysis, raising the GST is preferable to increasing taxes on personal income and savings because it "creates fewer distortions and is less harmful to economic growth," which is crucial for boosting productivity. This measure could also help maintain funding for essential services like health care and education.
Long-Term Implications and Caution
The report projects that defence spending could approach $150 billion annually by 2034 to 2035, a figure comparable to expenditures on major social and health-care programs. Busby cautioned against relying solely on debt financing, noting that it unfairly shifts the burden to future generations. "The benefits of improved defence accrue to Canadians today more than they accrue to Canadians in the future, so we just need to be very cautious about how much we want to use debt to finance this increase," he explained.
Despite the ambitious targets, Busby acknowledged that the funding strategy has not been fully developed. "How we are going to pay for all this hasn’t yet been fully fleshed out," he admitted, underscoring the need for careful planning and public discourse on this pressing fiscal issue.
