One of the two following statements is true: either Canada’s economy is headed for the worst four-year stretch in this country’s history, including the Great Depression; or, Ottawa has bungled the math on its plan to ramp up defence spending this decade.
Back in April, Defence Minister Bill Blair laid out a roadmap to move Canada toward its commitment to other NATO countries to hit the alliance’s minimum defence-spending target of 2 per cent of gross domestic product. The April plan envisioned defence spending hitting 1.76 per cent of GDP by 2030, up from 1.39 per cent in the current fiscal year.
In July, Prime Minister Justin Trudeau announced that Canada intended to hit the 2-per-cent threshold by fiscal 2032-33. He made that bare-bones announcement in Washington, as NATO gathered to celebrate its 75th anniversary.
The Prime Minister was, and continues to be, under pressure to meet that goal. Canada is the only NATO military power that has not laid out a plan to get to the 2-per-cent threshold, even as some alliance members have lobbied to boost that target. Pressed for details on the plan, Mr. Trudeau said defence spending would “clearly and naturally” rise to 2 per cent of GDP from 2030 levels.
The government’s math now looks flimsy, bordering on fantastical, given two reports from the Parliamentary Budget Officer and new information about the basis of the defence department’s calculations.
A July report from the PBO already raised questions about the economic forecasts used by the Department of Defence, or DND. A second report last week provided more details and raised fresh questions about Canada’s progress toward the 2-per-cent NATO goal. According to the most recent PBO report, Canada will lose ground after a bump in progress next year. By 2030, Canada will be spending 1.58 per cent of GDP on defence, much lower than the 1.76 per cent of GDP in forecasts from DND. (The actual dollar amount in 2030 will rise to $57.8-billion in fiscal 2030, up from $41-billion this year.)
The difference between the two forecasts stems from sharp variances in projections for economic growth. The PBO’s projections are in line with other economic forecasts, including those from the Finance department in the April federal budget. But DND’s numbers are much lower, with average forecasted annual economic growth of just 1.6 per cent from 2026 to 2030. Once inflation is taken into account, that implies four years of a shrinking economy – a losing streak longer than even during the Great Depression in the 1930s.
The Finance department does not predict an unprecedented contraction this decade, but rather a half-decade of solid growth. Two government departments are using two very different economic forecasts for their own purposes.
The Defence department’s initial response was that it was using figures from the Organization for Economic Co-operation and Development. But OECD projections are actually in line with the PBO’s outlook, not those of DND. When that was pointed out, DND then said that it uses (in fact, has to use) NATO numbers. NATO did not have an immediate response.
One statistical oddity: the numbers the Defence department uses for nominal GDP through to 2030 almost perfectly overlap the Finance department’s projections for real GDP. The Defence department’s outlook is consistent with simply using the wrong set of numbers.
Whatever the exact provenance of the forecasts, it’s clear that they are wrong – laughably wrong. The initial effect is to exaggerate the proportional size of domestic defence spending by lowballing the size of the economy, making it look as if Canada is progressing toward NATO’s goal, when it is not.
Come 2030, the PBO forecasts, the federal government would need to massively ramp up defence spending, adding $24.1-billion in just three years. That is not a case of spending rising “clearly and naturally,” as Mr. Trudeau said in July.
The fuzzy numbers from DND might be a mistake. They might be due to byzantine arithmetic from NATO. One thing is for certain: the Liberals have yet to come clean with Canadians that meeting this country’s defence commitments will require sacrifice, either in the form of higher taxes or reallocations of spending to military priorities. For their part, the Conservatives have been silent on how rebuilding the military would square with their vow to balance the budget.
Both parties need to lay out a clear, credible plan to reach the NATO goal during the life of the next government. Failure to do so should be disqualifying in the eyes of Canadians.