At the NATO summit in late June, Prime Minister Mark Carney was asked how Canada plans to fund the alliance’s ambitious new target for military spending: 5 percent of GDP. Would it mean higher deficits, new taxes, or cuts elsewhere? And how much debt is the federal government willing to tolerate?
The prime minister’s answer—faster growth and a balanced operating budget within three years—sidestepped the real issue. Namely, that meeting this defence commitment will require one of three hard choices: larger deficits, higher taxes, or significant spending cuts. It could even involve all three.
Little wonder there are now reports that the federal government is looking to lower program spending by 15 percent by 2028. But by the mid-2030s, even this may not be enough.
Short-term challenges
A recent analysis by the C.D. Howe Institute paints a sobering picture. Accounting for recent policy decisions—including the cancellation of the capital gains tax, the reduction in the first income tax bracket to 14 percent, the removal of the GST for first-time homebuyers, the shelving of the digital services tax, and a range of platform commitments—the deficit for this fiscal year could exceed $92 billion. Next year, it may approach $82 billion. These levels, if sustained, would push the net-debt-to-GDP ratio from its current level of roughly 43 percent to over 44 percent by 2028.
While these figures are not yet alarming in an international context, the longer-term trajectory is troubling. With new spending accelerating and revenues constrained by tax cuts, the fiscal landscape through 2035 is far more challenging than it appears today.
Military spending boost could double the deficit by 2035
Building on the C.D. Howe projections, I constructed my own forecast for federal finances to 2035. Nothing too sophisticated, but entirely reasonable to provide a good sense of scale.
