Canada's NATO Defence Spending Hike to 5% of GDP Could Add $63 Billion to Deficit, PBO Warns

PBO Projects Significant Deficit Increase from NATO Defence Target

Canada's parliamentary budget watchdog has issued a stark warning regarding the fiscal implications of the nation's commitment to a new NATO defence spending target. The Parliamentary Budget Officer (PBO) projects that Prime Minister Mark Carney's plan to increase defence spending to 5% of GDP by 2035 will add $63 billion to the federal deficit by the 2035-36 fiscal year.

The PBO's analysis, released recently, estimates that meeting this ambitious target will necessitate an additional $33.5 billion annually in core defence spending over the next decade.

The New NATO Spending Mandate

The commitment to increase defence spending to 5% of GDP by 2035 stems from the 2025 The Hague NATO summit, where member states pledged to adopt this new two-tiered spending formula. This target is divided into:

• 3.5% of GDP for core military expenditures, covering personnel, operations, equipment, and maintenance.
• 1.5% of GDP for security-related spending, encompassing areas such as cyberdefence, supply chain resilience, critical infrastructure, logistics, and defence innovation.

Prime Minister Mark Carney, who assumed office in March 2025, pledged last June to guide Canada towards this new 5% target by 2035. This follows an earlier commitment to reach NATO's previous 2% of GDP target by March 2026.

Fiscal Strain and PBO Concerns

Interim Parliamentary Budget Officer Jason Jacques highlighted that the fiscal effect of meeting the 5% NATO target would gradually increase over the next decade, ultimately raising the federal debt-to-GDP ratio by 6.3 percentage points in 2035. The PBO's report also noted a lack of detailed year-by-year breakdowns of future defence spending in the government's budget, and criticized the absence of supporting data for its projections.

Historically, Canada has often spent below NATO's defence spending guidelines. Previous PBO reports, such as one from October 2024, had already examined the fiscal implications of meeting the 2% NATO target by 2032-33, estimating that military expenditures would need to nearly double from 2024-25 projections to reach $81.9 billion by 2032-33.

Looking Ahead

The projected increase in defence spending represents a significant financial undertaking for Canada. While the government has outlined its top-line spending plans through to 2030, the PBO's analysis underscores the substantial budgetary adjustments required to meet the full 5% NATO commitment by 2035, and the potential impact on the federal deficit.