Canada Faces Major Defence Spending Challenge to Meet NATO Targets

A new report from the Parliamentary Budget Office (PBO) warns that Canada will need a substantial and sustained increase in defence spending to meet its NATO obligations by 2035. The Liberal government has yet to outline how it plans to reach the target of spending five per cent of GDP on defence within the next decade. The PBO estimates that core defence spending would need to rise from $95.7 billion in 2030 to $163.7 billion in 2035-36, a significant jump that would strain federal finances.

The PBO report highlights that achieving this goal will depend on the government's ability to manage complex procurement projects within a tight timeline, a challenge Ottawa has historically struggled with. The increased defence spending would widen the budgetary deficit by $63.7 billion, or 1.4 per cent of GDP, in 2035-36, while federal debt would rise by 5.7 percentage points of GDP. These financial implications underscore the scale of the task ahead.

The report also notes that the boost in military spending could have broader economic effects, influencing economic activity, industrial capacity, and the domestic defence industry. While current defence spending already supports various industries and regions, the long-term impact of the proposed increases remains uncertain. Canada has previously fallen short of NATO's two per cent GDP spending target, but Prime Minister Mark Carney has pledged to meet this benchmark for the first time this year.

Despite the lack of clarity on how Ottawa will fund the five per cent target, Finance Minister Francois-Philippe Champagne has indicated that more details will be provided in the government’s 2026 budget. He emphasized the need to ensure that the Canadian economy can finance these significant investments while meeting NATO requirements.