Economists project that ramped-up defence spending will raise Canada's real GDP in 2025 and 2026.Lars Hagberg/The Canadian Press
When Prime Minister Mark Carney announced that Canada would commit to NATO’s new defence spending target, he justified the steep increase by pointing to the heightened geopolitical threats facing the country.
But Mr. Carney’s government appears to see an economic opportunity in rearmament as well, suggesting that domestic industries and workers stand to benefit as Canada and its allies look to beef up their military capabilities.
Indeed, economists expect higher defence spending will have a stimulative effect on the economy – at least in the short run – and could contribute to sustained growth if it spurs productivity gains.
The long-term picture is murkier, however. Research suggests the benefits of rearmament over time are not guaranteed and will depend on how and where governments spend their money.
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Meanwhile, countries like Canada will likely have to borrow to pay for higher defence spending, adding strain to public finances and potentially coming at the expense of other fiscal priorities.
“What’s important to think about in defence is some of those longer-term considerations: what are we building, and how productive are those assets?” said Royal Bank of Canada assistant chief economist Cynthia Leach in an interview.
“The way in which Canadian procurement and content is embedded within that supply chain, and the amount of Canadian source innovation, is going to be important in terms of promoting longer term economic growth from that big push for defence spending.”
Prime Minister Mark Carney has promised to create a new agency that would prioritize buying Canadian gear and material.Sean Kilpatrick/The Canadian Press
Mr. Carney has committed to ramping up defence spending to 2 per cent of gross domestic product by next year, and promised to work toward NATO’s new target by 2035, which he said would cost Canada $150-billion per year. (That target will require member countries to spend the equivalent of 3.5 per cent on defence, and an additional 1.5 per cent on military infrastructure.)
The new NATO benchmark is not high in historical terms – Canada increased its defence spending from just under 2.5 per cent to more than 7 per cent of GDP during the Korean war rearmament between 1950 and 1953. But the economic context is quite different today, said Ron Smith, an emeritus professor at the University of London’s Birkbeck Business School.
Countries are saddled with higher levels of national debt and workers already face high tax rates, meaning higher defence spending will prove to be more fiscally challenging.
(A recent Nanos poll for The Globe showed that Canadians prefer more debt over higher taxes to finance increased military spending.)
“The way that you would finance rearmament – either increased debt, increased taxation or reduced other spending – are politically more difficult,” Prof. Smith said, noting European countries face similar challenges to Canada when it comes to financing the new spending target.
The hope, however, is that dollars spent on defence will reap broader benefits for the economy and partly make their way back to government coffers via tax revenues.
“The idea there, at least in theory, is that there would be growth dividends from that spending, and so it would keep the rise in public debt levels sustainable,” said Ms. Leach, who co-authored a report on the economic implications of higher defence spending in June.
A key factor that will determine the economic impact of increased defence spending will be whether the federal government can successfully build up domestic industries to supply the country with the defence equipment it needs.
Canadian defence procurement has been historically reliant on the United States, which dominates about 40 per cent of the global market. Without a plan to build what Canada needs at home, economists warn that higher defence spending may very well flow out to other countries.
Mr. Carney has promised to create a new defence purchasing agency that would prioritize buying Canadian gear and material. Industry Minister Melanie Joly told The Globe and Mail during an interview in July that a defence industrial strategy is being prepared and will be released in the coming months.
“I really think that we can create jobs through this strategy,” Ms. Joly said.
David Perry, president of the Global Affairs Institute, said the government should specify what kinds of defence services and equipment it wants to develop here at home in its industrial strategy.
Mr. Perry hopes the government will place particular emphasis on research and development (R&D), which has the most potential to spur productivity growth.
A 2025 study in the Journal of Economics and Statistics shows that a 10-per-cent increase in government funding of defence-related R&D generated on average a 5- to 6-per-cent increase in privately funded R&D, which resulted in productivity gains.
But for R&D to generate economic benefits, Mr. Perry said Canada needs to improve its commercialization efforts so that innovation leads to a product or service that can be sold.
“I think that’s where we’ve faced a lot of challenges of basically bridging the gap between really good initial, early-stage research and ... then translating that into commercially viable enterprises that are sustainable beyond that initial research phase and can generate significant revenue,” said Mr. Perry.
Economists also see an opportunity in spending on dual-use infrastructure that supports the country’s defence capabilities and other economic activities.
Increased defence spending will give the military access to remote areas to better defend Arctic sovereignty, which could have significant economic spillover effects.Adrian Wyld/The Canadian Press
Desjardins chief economist Jimmy Jean said building infrastructure that would help get critical minerals to market while also giving military access to remote areas to better defend Arctic sovereignty is an example of a dual-use investment that could have significant economic spillover effects.
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Although analysts are hopeful that that Canada’s renewed commitment to bolstering its defence capabilities will be a net economic benefit, there are risks that it could be counterproductive to the economy as well.
In addition to the risk that Ottawa may fail to build up domestic capabilities and instead adds strain to public finances, Ms. Leach’s report for RBC notes government spending could crowd out private investment in more productive parts of the economy.
Mr. Jean agrees, adding that any increase in government spending risks crowding out private investment, “because at the end of the day, all those expenditures ... are going to be fighting for the same resources, be it capital or the labour.”