Report

The Fiscal Implications of Meeting the NATO Military Spending Target

Oct 30, 2024

This report examines the fiscal implications of Canada’s recent commitment to meet NATO's military spending target of 2% of GDP by 2032.

Highlights

Canada has recently committed to meeting NATO’s 2% of GDP military spending target by 2032-33. According to a PBO hypothetical scenario where this target is met, defence spending would have to nearly double as compared to projections of spending for the current fiscal year (2024-25).
DND figures released along with its new defence policy, Our North Strong and Free: A Renewed Vision for Canada’s Defence, project military spending to reach 1.76% of GDP by 2029-30, but these figures are based on an erroneous GDP forecast. Adjusting for the correct GDP growth rates, military spending only reaches 1.58% of GDP by 2029-30, leaving a 0.42 percentage point gap to meet the 2% target by 2032-33.
In the hypothetical scenario, the debt-to-GDP ratio initially remains stable before beginning a gradual decline, reaching 38.2% by 2032-33, suggesting that the government can still achieve its goal of a declining debt-to-GDP ratio despite increased military expenditures.
The deficit-to-GDP ratio would be impacted more substantially over the medium term by the increased military spending, failing to reach the stated goal of 1% of GDP by 2026-27, and may exceed guidelines in the latter years of the forecast.