Prime Minister Mark Carney speaks with National Defence Minister David McGuinty. Mr. Carney announced a significant boost in military spending, saying Canada is too reliant on its neighbour to the south for security.Arlyn McAdorey/Reuters
Eugene Lang is an assistant professor in the school of policy studies at Queen’s University, a senior fellow at the Bill Graham Centre for Contemporary International History at the University of Toronto and a fellow at the Canadian Global Affairs Institute.
Canada is about to embark upon the largest increase in defence spending in generations. It is expected that this will transform the Canadian Armed Forces. What is less discussed is its impact on public finances, government priorities and the economy.
In these areas, the impact could be transformational, too. Prime Minister Mark Carney’s defence announcement on Monday is also aimed at boosting the economy – giving Canadians both guns and butter.
Thirty-five years ago, British prime minister Margaret Thatcher and U.S. President George H. W. Bush popularized the phrase “peace dividend.” The Berlin Wall had crumbled, the Soviet Union had disintegrated and the Warsaw Pact had dissolved. NATO had triumphed after 40 years of Cold War.
The idea of the peace dividend was simple and seductive. With peace upon us, defence budgets could be slashed and resources diverted to social programs and tax cuts. Butter in exchange for guns.
No country lived the peace dividend dream longer, and embraced it with greater enthusiasm, than Canada. In 1990 Canada’s defence spending was 2 per cent of gross domestic product (GDP). Within a decade it was cut in half by both Progressive Conservative and Liberal governments. The peace dividend was a bipartisan affair. And it delivered for Canadians.
In the late 1990s the peace dividend played no small part in the elimination of the chronic federal budget deficit. In the first decade of this century it helped finance the largest tax cuts – on personal and corporate income and consumption – in Canadian history. And in the past 10 years it permitted a big expansion of Canada’s social safety net.
On Feb. 24, 2022, however, the peace dividend – on life support in some countries for more than 20 years yet still breathing comfortably in Canada –was dealt a fatal blow by Russian President Vladimir Putin when his army crossed Ukraine’s border. On that day Canada began to be dragged into a new era, characterized by what we might call the Putin Premium – first formally put on the NATO table at the 2014 Wales Summit after the invasion of Crimea that year.
Russia’s annexation of Crimea, following its invasion of Georgia six years earlier, convinced NATO member states to agree to spend 2 per cent of GDP on defence to deter further Russian aggression. Canada signed on to this pledge, then abandoned it. The peace dividend still walked the halls of Ottawa.
The advent of the Carney government, however, has finally relegated this post-Cold War relic to the dustbin of Canadian history.
Carney lays out defence boost, says era of U.S. dominance over
In its place, Mr. Carney laid out a new vision for Canada’s national defence in what is the most important speech on the topic any prime minister has given in decades. The 2 per cent of GDP target will be met this fiscal year (2025-26).
Politicians routinely claim their initiatives are transformational. They rarely are. This one probably is.
Lifting Canada’s defence spending to this extent will transform public finances and government priorities owing simply to the magnitude – an immediate $9-billion-per-year increase to national defence, indexed to nominal growth in the economy. This increment is more than half the value of the Canada Social Transfer to the provinces to support education and social assistance. It is more than the federal government spends on research and development and equal to one percentage point of the GST.
The new $9-billion will be spent on a number of things, notably pay increases for the Canadian Armed Forces; base infrastructure upgrades; capital equipment investments; and a revitalized defence industrial base.
What stood out was that the Prime Minister made clear this spending is also designed to have a big impact on the Canadian economy. “The transformation of our military capabilities,“ the Prime Minister said, “can help transform our economy,” deploying “Canadian innovation, ingenuity, and industry” and “creating tens of thousands of more fulfilling, high-paying careers for Canadian workers.”
He repeated his view that Canada is too reliant on the United States and “should no longer send three-quarters of our defence capital spending to America.”
And he said he wants a defence industrial policy, something Canada has not had in generations, largely because the Department of National Defence has never been interested in one, nor more generally in the impact of its spending on the national economy.
This time might be different with a professional economist as Prime Minister who has an ambitious goal to make Canada the fastest-growing economy in the G-7.
Mr. Carney is also in tune with European politics and economics. He no doubt took note of the German government’s argument that spending on roads and bridges should count as defence expenditure. Not to mention that British Prime Minister Keir Starmer’s boost to defence spending is designed to “create jobs, wealth and opportunity in every corner of our country” – what Mr. Starmer calls the “defence dividend.”
In those countries and others, the paradigm shift happening in defence spending is seen as being as important to the economy as it is to the military. Canada’s new Prime Minister seems to have gotten that memo.