Prime Minister Mark Carney and other leaders at the NATO summit said on Wednesday they would raise defence-related spending to the equivalent of 5 per cent of GDP by 2035.Pierre Crom/Getty Images
Well that was easy. Canada has just officially signed on to NATO’s latest target for military spending: 5 per cent of GDP, to be achieved by 2035. All it took was a stroke of the prime ministerial pen. If only most things in life were so simple.
We only just announced, as you’ll recall, that we’d meet NATO’s former target of 2 per cent of GDP, 19 years after we first said we would and 11 after we first said it like we meant it. We’re still just saying it, mind: In the absence of a budget or a detailed plan we’ll have to take the Prime Minister’s word for it, at least until the final numbers for the current fiscal year are in.
Two per cent in itself will take a lot of heavy lifting. The last time Canada devoted so much as two per cent of its GDP to defence was in 1972. At today’s GDP of roughly $3.2-trillion, that adds up to more than $60-billion annually.
But five per cent? You’d have to go back to the 1950s to find a time when this country spent so much on the military. Of course, five per cent is somewhat misleading. The new NATO target is actually two targets: 3.5 per cent of GDP for defence spending, as usually defined, and 1.5 per cent for defence-related spending: things like ports and roads, which could be used for both military and civilian purposes.
Let’s assume, for the sake of our sanity, that we were going to spend that money anyway. That hardly gets us off the hook. The last time we spent even 3.5 per cent of GDP on defence was in the early 1960s. Mind you, in those days defence was a big part of what the federal government did. Since then it has found a lot of other things to spend money on. In the early 1960s, defence spending represented a quarter of all federal program spending (it was as much as a half a decade before). Today it is just 8 per cent.
In current dollars, 3.5 per cent of GDP equals about $110-billion annually: $50-billion more than even our previous defence spending commitment (the one we announced two weeks ago). The good news is, we don’t have to get there right away. We have 10 years. The bad news is that the economy will have grown in the interim, meaning our defence requirement will as well. At 4 per cent nominal growth in GDP, we’re looking at over $160-billion. Another $100-billion, on top of current defence spending. A year.
Again, for sanity’s sake, let’s keep it in the here and now. Where are we going to find $50-billion a year? We could just borrow it, I suppose. We could, that is, if this were just a temporary defence buildup, as in wartime. But this is intended to be more or less permanent, or as long as Russia and China remain in their current expansionist frame of mind.
(It is also likely to outlast the current occupant of the White House. The reason the rest of NATO is having to spend more is that the United States has signalled it is unwilling to bear as much of the burden for the defence of the West as it has in decades past. That’s likely to be true no matter who is president.)
Remember that we already have a federal deficit in excess of $50-billion (again, exact numbers will have to await the budget). With provincial deficits adding up to something similar, and with a recession looming, the notion that we could just chalk it all up to the national credit card, in perpetuity, is surely out of the question.
We could always raise taxes, of course. But the Prime Minister has already ruled that out. It’s not hard to see why. There’s always a constituency for raising taxes on the “rich,” even with a top marginal tax rate, in some provinces, in excess of 53 per cent. But to raise these kinds of sums – roughly 10 per cent of current federal revenues – it won’t be sufficient just to increase rates on the monied, even if that were advisable (we’d also like those people to invest more here): There just aren’t enough of them.
The only way you could even come close to raising $50-billion a year is by raising taxes on the broad mass of the population, i.e. the middle class. That, as they say, is where the money is. Alas, that is also where the votes are. Hence: Carney. Politicians will often fearlessly make the case for raising taxes on other people. There aren’t many, you’ll notice, who promise to raise taxes on you.
So a good part of that $50-billion will have to come out of current spending. This is the point at which the pundit will screw up his face into a worried frown. It just can’t be done, he will explain.
Have a look at the last federal budget, for fiscal 2025. Total program spending, not counting the now-defunct carbon pricing rebates, was $465-billion. Of that, nearly 30 per cent – $135 billion – went out in transfers to persons: elderly benefits, Employment Insurance and the Canada Child Benefit. What politician is going to touch those?
Another $105-billion was in transfers to other levels of government: for health care (untouchable), for equalization (ditto) and other social programs. That left just $225-billion in direct-program spending – $123-billion for operating expenses, $102-billion in discretionary transfers – the kind the federal government actually has some control over. And we’re supposed to carve $50-billion out of that? Can’t be done.
Can’t it? That might be accurate as political statement. But is it accurate in principle? Is it possible to cut $50-billion out of program spending, without harm either to vulnerable individuals or core functions of government?
Let’s have another look at those untouchable social programs. Elderly benefits are made up of Old Age Security, paid out to everyone over 65 with a net income of less than $94,000 (a 15 per cent clawback applies above that amount), and the Guaranteed Income Supplement, which is phased out much more rapidly (50 cents on the dollar) and at much lower levels of income. Back-of-the-envelope math suggests combining them into a single, income-tested benefit at a clawback rate of, say, 20 per cent ought to save at least $3-billion.
Editorial: It’s time to retire subsidies to rich seniors
Employment insurance remains a tangled mess, bearing no resemblance to insurance principles. Thirty years ago – the last time EI reform was seriously discussed – it was estimated that some relatively mild reforms, based on comparable programs in other countries, would yield $6-billion in savings. Surely we could save half that today.
Equalization, similarly, is no longer about equalization: Not when seven of the 10 provinces are considered “have-nots,” and not when payments are increased on a fixed schedule year after year, regardless of whether the provinces grow more equal. So reform, and savings, are very much on order here. Another couple of billion?
As for federal-provincial health transfers, it should be obvious by now that these are the chief impediments to health care reform, blurring accountability and dulling incentives to make more efficient use of scarce resources. Convert these into tax points, at a rate of exchange that pays the provinces less in the short term (shared sacrifice and all that) but which grows in line with the economy, offering them more money in the long term.
On to direct program spending. As far as operating expenses are concerned, the growth of the public service over the past 10 years – a 25-per-cent increase in the number of employees per million population – is well known. Returning the number of employees per capita to the level of a decade ago, an overall reduction of roughly 75,000 personnel, would save on the order of $7-billion to $9-billion. Bringing civil-service compensation in line with private-sector equivalents would save even more.
Even bigger savings are possible in transfer payments. Just to list the “grants and contributions” over $100,000 takes up hundreds of pages of fine print in the Public Accounts. Much of this goes to business – not only private business, but the federal Crown corporations: Canada Post, Via Rail, the CBC, the Business Development Bank of Canada, and so on.
A study for the University of Calgary School of Public Policy by John Lester, a former Finance boffin, finds subsidies to business now total more than $40-billion, just at the federal level alone. At least 80 per cent of these he finds are not justified by any purported market failure, and/or reduce economic efficiency.
To be sure, many of these – more than half the total in dollar terms – are delivered through the tax system. Weeding out these market-distorting “tax expenditures” ought to be part of any genuine exercise in spending restraint, even if the figures are formally recorded on the tax side of the ledger. Foremost among these: the preferential tax rate for small businesses, worth $7-billion on its own. A similar list of tax expenditures could be compiled for the personal income tax.
These are necessarily broad-brush calculations. The point is simply to suggest that, with sufficient political will, it ought to be possible to recoup the bulk of the $50-billion we are about to pour into defence out of existing spending (including tax expenditures), rather than either increasing borrowing or raising tax rates.
And if we do? Then we only have the existing $50-billion deficit to worry about. I never said I could solve all our problems.