Prime Minister Mark Carney, middle, pledged during the NATO leaders' summit in June to spend 5% of GDP on defence by 2035.Sean Kilpatrick/The Canadian Press
A steep new military spending commitment for Canada – the biggest increase in more than 70 years – has handed Mark Carney’s government a fresh challenge: how to pay for it.
At the June, 2025, NATO leaders’ summit, the Prime Minister pledged that Canada will spend as much as $150-billion annually on defence within a decade: equivalent to 5 per cent of the country’s gross domestic product (GDP).
By comparison, the federal budget for defence-related spending this fiscal year in Canada is about $63-billion or 2 per cent of annual economic output.
The pledge – part of a collective boost in military spending to safeguard against threats from Russia and elsewhere – will force Ottawa to run bigger deficits, raise taxes or make major cuts to spending.
In a report this week, the C.D. Howe Institute warned that election promises and massive defence spending increases will fuel huge annual federal budget deficits averaging more than $77-billion a year.
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The Carney government has delayed tabling a budget until the fall, but Parliamentary Budget Officer Yves Giroux has estimated that the deficit this fiscal year will likely exceed the $62.3-billion shortfall projected in the Liberal Party’s election platform that was released in April.
The C.D. Howe outlook, whose authors include former federal Finance Department official Don Drummond, said the federal government would face a cumulative deficit of $311-billion over four years.
If the savings promised in the Liberal election platform − from penalties, fines and spending cuts − are not realized, the cumulative deficit would be $342.7-billion for an annual average of $85.7-billion, it said.
The C.D. Howe report called for scaling back election platform commitments, finding much deeper savings within current operations “and reconsidering how Ottawa transfers funds to the provinces and territories” to help lighten the fiscal load.
It also recommended a “modest increase” in the federal goods and services tax (GST).
Mr. Drummond, who also once served as chief economist of the Toronto-Dominion Bank, said Canadians must understand the magnitude of the new NATO commitment, which has two components.
The first component is Canada and other NATO countries have agreed to boost core military spending to 3.5 per cent of GDP by 2035, or within 10 years. That would mean adding about $48-billion to the defence budget on a permanent basis.
The second NATO commitment is to spend 1.5 per cent of GDP on security- and defence-related infrastructure that would have a dual civilian and military purpose, such as bridges, ports and roads, as well as cybersecurity and measures to protect energy pipelines.
That’s at least another $48-billion in annual spending, although Mr. Carney has said that Canada can easily meet this target by claiming infrastructure expenditures that would happen anyway.
U.S. President Donald Trump, centre, speaks with NATO Secretary-General Mark Rutte, left, during a group photo of the military alliance's leaders in June. Leaders committed to boost core military spending to 3.5 per cent of GDP in 10 years.Geert Vanden Wijngaert/The Associated Press
Mr. Drummond said he can’t rely on Mr. Carney’s assurance for this and so his math assumes that at least half of this second target, or $24-billion, will need to be accounted for in the fiscal framework. Together, at a minimum, the two NATO targets would cost Canada $72-billion in additional annual spending.
That’s approaching what Ottawa currently spends annually for old age security benefits, the guaranteed income supplement and the spouse’s allowance, Mr. Drummond noted. Canada paid out more than $76-billion in such transfers in the 2023-24 fiscal year, according to Ottawa’s public accounts.
(None of these calculations take into account the added cost of joining Donald Trump’s “Golden Dome” missile-shield project, which the U.S. President has said would cost Canada US$61-billion.)
Mr. Drummond said it’s not fair to young Canadians and future generations to add so much debt to Canada’s balance sheet.
He noted that the fall 2024 fiscal statement indicated that 1 percentage point of the GST collects about $11-billion in revenue annually. Some economists consider the GST among the least economically harmful taxes because taxing consumption is better for productivity than taxing income.
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Michael Wernick, a former head of Canada’s public service, said the magnitude of the defence obligations should not be underestimated.
“It’s a mistake to think of this as a short-term issue,” he said. “It’s going to bedevil finance ministers for the next six or seven budgets and probably be relevant to the next two federal election campaigns.”
Mr. Wernick is suggesting a 2-per-cent “defence and security tax” (DST), which would apply when purchasing goods and services - just like the GST. It could be applied for 10 years and would be a “very visible piece of public finance” that Canadians would understand they are paying.
Canada’s GST is 5 per cent today and when charged alongside provincial sales taxes, the combined rate is as high as 15 per cent in some provinces.
Mr. Wernick said Canada has more room to manoeuvre when it comes to raising money through consumption taxes than some other NATO member countries. The standard value-added tax in Britain is 20 per cent and Germany’s is 19 per cent.
“My argument is just political realism. I can’t imagine a government in Canada that’s going to cut old age pensions or the health transfer.
Former parliamentary budget officer Kevin Page in April, 2012.Reuters
Former parliamentary budget officer Kevin Page said he believes there is no appetite right now for increasing taxes as Canadians are still adjusting to dramatic increases in the price of housing and food.
“Affordability is still a key issue,” Mr. Page, now president of the University of Ottawa’s Institute of Fiscal Studies and Democracy, said. “You can’t raise taxes in this environment.”
Mr. Page said economic growth over the next 10 years − and the associated increase in tax revenue for Ottawa − could cover some of the increase in defence spending.
The Official Opposition Conservative Party had no suggestions for what measures to adopt to tackle the increased defence spending commitment when asked for comment Friday.
James Bezan, Conservative defence critic, said his party supports more money for the military.
“Conservatives support rebuilding our proud military after the last decade of Liberal neglect. Our warships are struggling to stay in the water, our armoured vehicles are in a state of disrepair, and our fighter jets are old enough to be museum pieces,” Mr. Bezan said.
“The Canadian Armed Forces need new capabilities to defend Canada now, not ten years from now. This requires a plan and a budget,” Mr. Bezan said.
“Carney can make all the big spending promises he wants, but at the end of the day, Conservatives expect the Liberals to explain to Canadians how they will equip and support our military heroes who protect us here at home and stand with our allies when called upon.”