In my most recent column, I countered the false claims made by those who try to dissuade Canadians from supporting the strengthening of our Armed Forces.
One of those false claims is that Canada cannot afford a military buildup. Here’s what I wrote about it:
“Claims that Canada has no money or that we can’t afford to expand our military are simply false. Canada has one of the world’s best national credit ratings, at either AAA or AA+ depending on which rating agency you look at. If necessary, Canada can afford to borrow significant sums of money to finance a military buildup. Further, restraint in overall non-military federal spending would create significant room to raise military investment. There is no financial barrier to Canadian rearmament.”
Given that affordability is one of the most oft-raised concerns regarding Canadian military expansion, I will address it in more detail below:
To start, Canada’s defence spending stands at 1.4% of GDP, far below the 2% NATO target, and even farther below what will almost certainly be a higher target following the next NATO summit this month.
As you can see below, Canada lags behind many comparable nations:
South Korea: 2.6%
UK: 2.28%
Germany: 2.12%
Australia: 2.05%
France: 2.05%
Japan: 1.8%
Canada: 1.4%
Canada’s debt picture
This underspending cannot be rationally explained as a response to affordability concerns. When looking at central government debt, Canada is well-positioned. According to the IMF, Canada’s debt-to-GDP ratio stands at 49.92% as of 2023. For comparison, that figure stands at 112.26% in the United States, 92.3% in France, 100.53% in the UK, 44.89% in Germany, 205.61% in Japan, 48.85% in South Korea, and 34.83% in Australia.
When provincial government debt is included, the picture changes somewhat for Canada, with our total debt hitting 107.5% of GDP. However, as noted by National Bank of Canada, the unique structure of the Canada Pension Plan and the Quebec Pension Plan, both of which hold substantial amounts of assets, gives Canada one of the best net debt-to-GDP ratios in the G7. Including those assets puts Canada’s net debt at under 20%, better than all other G7 nations, even fiscally conservative Germany.
Strong credit
This is reflected in Canada’s solid credit rating.
Both S&P Global Ratings and Moody’s Investors Service give Canada a triple-A rating, while Fitch Ratings gives Canada a rating of AA+. In all three cases, Canada’s outlook is ‘stable’, though Fitch has warned that long-term overspending could ‘compound Canada’s fiscal challenges.’
Notably, Canada has a better credit rating than the UK, South Korea, and France, and we are in line with Germany and Australia. All of those countries spend more than we do on defence as a percentage of GDP.
Canada’s deficit is also low compared to many of our peers. As a percentage of GDP, our deficit is 2.15%, compared to 7.2% in the US, 5.80% in France, 5.75% in the UK, 2.80% in Germany, 0.67% in South Korea, and 2.26% in Japan.
Canada has room to spend and borrow more in the short term to finance a large military expansion. We can borrow at affordable rates, our credit rating is strong, our net-debt position is solid, and our deficit is manageable.
Economic benefits
We should also remember that defence spending contributes to the economy. Thus, increased defence spending leads to a larger economy and generates spin-off activity, meaning part of the increase pays for itself.
This is a point made by CIBC Capital Markets in a recent report. A key excerpt is included below. In particular, note the importance of investing in domestically-produced equipment and the fact that defence spending is a positive economic multiplier for developed nations like Canada:
“If you were unfortunate enough to take an Economics 101 course, you probably remember the guns and butter tradeoff as a classic example of the economy’s production possibility curve. In a two-good economy, consuming more guns (defence) comes at the expense of butter and vice versa.
This is certainly the case for less developed countries (LDCs), where empirical evidence suggests a clear negative multiplier associated with defence spending. That is largely due to the fact that LDCs in general have lower government quality with a higher degree of corruption. Furthermore, rent seeking in the military along with inefficient operations tend to increase the cost of military spending. Another factor is that virtually all LDCs are net arms importers.
As for developed countries, the opposite is the case. Empirical evidence points to a clear positive economic multiplier from defence spending. After all, military spending should not be defined only by cost. The broad consensus is that the economy expands to accommodate at least part of the increase in defence spending, production, procurement, and employment.
The only debate is with regard to the size of that multiplier. The ultimate effect of that multiplier will depend on the economic environment in which the spending takes place.
Tighter monetary policy in response to an increase in defence spending will clearly limit any positive impact. The same applies to the way that spending is financed. Debt financing as opposed to higher taxes will lead to a much larger multiplier. Another important factor here is the share of imports in overall military spending. The higher the share, the smaller the multiplier.”
At a time when Canada needs investment, when young Canadians need jobs, and when sectors like steel, aluminum, and auto production are under threat, a large-scale military buildup is exactly what our country and economy need.
Canada can afford a powerful military
After looking at the facts, the conclusion is clear: Canada can afford a large-scale military buildup. And so long as that buildup is largely focused on domestically-produced equipment, it could not only be affordable, but also increase our long-term prosperity.
Spencer Fernando
Image – YouTube
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