Meeting NATO’s defence spending target of 5 percent of GDP by 2035 will require a “substantial and sustained increase” in Canadian defence spending, according to the Parliamentary Budget Office (PBO).
“The scale and composition of this increase could have broader implications for the Canadian economy,” the PBO said in an Oct. 6 report on Canada’s defence spending commitments and their implications for the budget and the economy.
Canada has committed to raising defence spending to 4 percent of GDP by 2030 and 5 percent by 2035—targets the PBO says could increase the annual federal deficit by $63.7 billion by 2035-36 and add substantially to the federal debt.
The 5 percent target includes 3.5 percent of GDP for core defence spending—including personnel, operations and maintenance, major equipment, and research and development—and 1.5 percent of GDP in ancillary defence and security-related spending, such as critical infrastructure, civil preparedness and resilience, innovation, and the defence industrial base.
“Meeting Canada’s NATO defence spending commitments will require a substantial and sustained increase in defence spending over the coming decade,” the report said.
The PBO said the target of 4 percent of GDP by 2030-31 includes core defence spending of 2.5 percent of GDP, which would require Ottawa to spend $95.7 billion that year. Core defence spending in 2025-26 was $63.5 billion, meaning spending would need to increase by $32.2 billion, or more than 50 percent.
Meanwhile, the report said the federal government would have to increase core defence spending to $163.6 billion in 2035-36 to meet the core defence component of NATO’s 5 percent target. This would represent an increase of $70.1 billion compared with keeping core defence spending at 2 percent of GDP.
NATO members pledged in 2014 to spend 2 percent of GDP on defence, a level Canada reached in March of this year. The new spending target of 5 percent was agreed upon in June 2025.
“The ambitious cash spending plan required to meet NATO targets in the next 5-10 years can be expected to elevate accrual fiscal profiles into the medium term,” the PBO said.
The PBO estimates that additional core defence spending would increase the annual federal deficit by $63.7 billion, or 1.4 percent of GDP, in 2035-36. Federal debt would also be 5.7 percentage points higher as a share of GDP than if Canada maintained core defence spending at 2 percent of GDP.
The report also raised questions about Ottawa’s ability to spend the additional money on schedule. Between 2017-18 and 2023-24, the Department of National Defence spent $18.5 billion less on capital projects than originally projected.
The PBO said the department has improved recently, but the historical shortfall raises questions about whether Ottawa can achieve its new spending commitments on schedule.
The PBO said its projections assumed Ottawa would borrow to finance the additional spending. To reduce the effect on the deficit and debt, the government would have to raise revenue or cut expenses elsewhere.
The report added that Ottawa “projects $125 billion in downstream economic activity from defence procurement by 2035.” That projection assumes the government meets its Defence Industrial Strategy targets, and benefits from “reasonable” economic growth and “increased domestic procurement.”
Prime Minister Mark Carney created the Defence Investment Agency a year ago in a bid to speed up defence procurement. He appointed former Royal Bank of Canada executive Doug Guzman as its CEO.
On Oct. 6, Liberal government tabled legislation to turn the Defence Investment Agency into a Crown corporation. Bill C-40 will create an entity called the “Canadian Corporation for Defence Investment,” which will report to a new associate minister of national defence dealing with procurement.
The federal government says as a Crown corporation, the agency will have more independence from government, get its own board of directors, and be able to make decisions more quickly.
The Canadian Press contributed to this report.
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