(Bloomberg) -- Canada would have to nearly double its defense spending to keep its promise of reaching the NATO target of 2% of gross domestic product by 2032, the country’s budget watchdog says.
The parliamentary budget officer also disputes the government’s earlier claim that military spending is set to reach almost 1.8% of GDP by the 2030 fiscal year.
“These figures are based on an erroneous GDP forecast,” the office led by Yves Giroux said in a report published Wednesday. The government is assuming average nominal GDP growth of 1.7% from 2025 to 2030 — which is likely lower than the rate of inflation and implies a recession, the office said.
Using more realistic assumptions for growth, defense spending would hit only 1.6% of GDP by 2029-30, leaving a gap of 0.4 percentage points to the target, the watchdog said.
Giroux’s report may increase pressure on Prime Minister Justin Trudeau’s government to accelerate its defense spending plans to convince allies that Canada’s serious about hitting its pledge to the North Atlantic Treaty Organization. This year, 23 of 32 NATO members are expected to reach or exceed the 2% threshold. Republican candidate and former President Donald Trump has previously threatened not to come to the aid of allies who don’t spend enough on defense.
According to the scenario laid out by Giroux’s office, defense spending would have to nearly double — from a projected C$41 billion ($29.4 billion) in the current fiscal year to C$82 billion in 2032-33 — to get to 2%.
“This increase requires a rapid escalation of expenditures following the conclusion” of the government’s defense policy update, which runs until 2029-30 and forecasts expenditures of C$57.8 billion, the office said.
The government might still be able achieve its goal of a declining debt-to-GDP ratio despite increased military expenditures, the report said. But it may have to break Finance Minister Chrystia Freeland’s promise of a deficit that’s no more than 1% of GDP by 2026-27.
Canada was the last of the 32 members of NATO to announce a plan to reach the 2% spending target, despite first agreeing to it in 2006. Trudeau set the 2032 timeline at the alliance’s summit in July, although he provided few concrete details and described the target as a “crass” metric that doesn’t adequately measure the country’s contributions.
Trudeau has pledged to buy a new fleet of under-ice capable, non-nuclear submarines, a process that will take many years, pushing the country closer to the target. The government has also laid out several other spending priorities to reach the goal.
It’s the second time in two weeks that the PBO has raised doubts about Freeland’s ability to meet one of her fiscal pledges. Earlier this month, the watchdog estimated the federal government would run a deficit of C$46.8 billion in fiscal year 2023-24 — higher than the C$40 billion Freeland committed to in her April budget — when the final numbers are in.
Freeland hasn’t announced a date for the government’s fall update on the country’s finances.
--With assistance from Erik Hertzberg.
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