Will Canada get to 3.5%?

Defence spending and the limits of expertise

Canada has pledged to spend 3.5% of GDP on defence by 2035. If Ottawa eventually reaches that goal, will it be sustained? As I discussed on a recent episode of Canadaland, I’m skeptical. While we may hit the 3.5% target, I suspect that we’re more likely to hover around 2-2.5%.

Others disagree. Many defence analysts, investors, and founders are betting that Canada is serious about 3.5%. People in the Carney government, moreover, are adamant that these spending ambitions are genuine.

Am I confident that I’m right? No, not really. As Seva Gunitsky recently outlined in a great post about Russia’s invasion of Ukraine, drawing on Tetlock’s work, those who study issues closely are often bad at predictions, while generalists are surprisingly good at forecasting. One reason why this happens is that so-called ‘experts’ expect past patterns to repeat themselves, often discounting or missing new realities that change these patterns.[*]

My sense of things is indeed based on past patterns and trends in Canadian defence. That means that I may be discounting significant changes that are breaking past habits. Canada may be changing in ways that make a sustained 3.5% of GDP defence spend likely.

What historical patterns make me skeptical?

First, Canada has tended to boost defence expenditures during wars and crises, only to immediately reduce this spending once the war or crisis is over. We see this during the First World War, Second World War, Korean War, and Afghanistan. Our current defence spending increases may follow a similar trajectory. If Canada-US relations improve post-Trump and the war in Ukraine ends, Canadians may feel that large defence budgets are no longer merited, particularly if they require additional taxes, cuts to popular social programs, or heavy debt to fund them.

Second, defence expenditures have suffered when Canada decides to tackle the debt and budget deficits. Pierre Trudeau’s government undertook a major recapitalization of the Canadian military from 1975-1984. Brian Mulroney’s government pledged to go further in the 1987 White Paper, which included a promise to acquire nuclear-powered submarines. These policies were pursued while the federal debt ballooned. Starting in 1992, however, an unsustainable fiscal situation led the Mulroney government to start cutting defence. Jean Chrétien’s government went further still, reducing defence expenditures by 30% to balance the budget in the mid-1990s. Stephen Harper’s government also kept defence budgets near 1% of GDP in the aftermath of the 2008 financial crisis.

Third, there’s no evident bipartisan consensus to spend 3.5% of GDP on defence, and the deficit hawks are already starting to question the affordability of this pledge. The Conservatives remain wedded to the goal of balanced budgets and have been soft supporters of spending 2%. If they retain that mentality when they eventually form government, defence expenditures may level off or fall as a percentage of GDP. The Parliamentary Budget Officer and C.D. Howe Institute have published reports that raise hard questions about how Ottawa plans to afford a 3.5% of GDP defence spend, too. And concerns that the Carney government’s spending is blowing through previous fiscal guardrails are growing louder in the commentariat.

Finally, Canadian policy can be faddish. A decade ago, the received wisdom was that Canadian political parties needed a climate change plan if they wanted to win elections. Environmental policies were at the centre of Justin Trudeau’s prime ministerial agenda as well. The importance of climate has basically flipped since Carney was appointed Prime Minister. Climate hasn’t disappeared as an issue, though its far from a priority for the government at the moment. Defence investments could undergo a similar 180. Defence is at the top of the agenda now, but that doesn’t tell us much about how it’ll fare in the future.

Why might I be wrong?

Canada could get away with cutting defence expenditures after past conflicts and crises because we had a friendly ally to lean on: first the United Kingdom, then United States. Our current situation is different, insofar as our main ally is putting pressure on us to reach 3.5%, and Canadians see that ally as a threat to our sovereignty. These circumstances present a new dilemma that may lead to much higher defence expenditures.

Next, we’re living through a wider polycrisis. There isn’t one crisis that will pass. There are multiple intersecting crises that will wax and wane. Some of these crises may diminish, but others will worsen. We may not have a moment where we can relax or take a breath for the foreseeable future. Put differently, there won’t be any peace to allow for a peace dividend.

What else? Canada’s defence investments and industrial policies may pay off economically. If increased defence expenditures fuel growth and productivity, and create well-paying jobs, public support for military spending could remain strong. We may also be in an era where industrial policy is en vogue and concerns about balanced budgets are reduced.

In the end, it comes down to the plausibility of the following phrase: This time is different. I’m incorrigible contrarian and pessimist, so my inclination is to assume that Canada is going to Canada. But I’ve spent too much time studying this stuff, so don’t take my word for it.

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[*] I dislike the term ‘expert’ when it comes to academics who study topics such as mine (defence policy or machinery of government), where practitioners are usually more knowledgeable.