Canada faces steep climb meeting 5 per cent NATO defence spending pledge while carrying high debt

Canada faces a steep fiscal challenge in meeting its NATO commitment to spend 5 per cent of GDP on defence by 2035, according to analysis from the C.D. Howe Institute.

The new 5 per cent defence pledge is made up of two parts: 3.5 per cent devoted to core defence capabilities, with at least 20 per cent of those expenditures directed toward major equipment and research and development. The remaining 1.5 per cent can be spent on defence-related infrastructure and other investments. Core defence spending will need to approach $150 billion by 2034–35 — roughly three times the current levels and comparable to the federal government's annual transfers to provinces.

Canada falls into a challenging position. NATO estimates Canada's defence spending was at 2.1 per cent of GDP in 2025, well below the NATO average of 2.8 per cent. Canada's government debt-to-GDP ratio — which includes the provinces and the federal government — is just over 80 per cent, compared with an average of less than 70 per cent among other NATO members. This means Canada must substantially increase defence spending while managing an already elevated debt burden.

Countries with modest debt and high defence spending, such as Nordic and Baltic nations, are best positioned to meet expanded military capabilities. Traditional military powers like the United States, Britain and France spend heavily on defence but increasingly face fiscal strain.

In Canada, an aging population will continue to increase spending on programs such as Old Age Security while slowing revenue growth. Weak productivity and uncertainty surrounding international trade further restrain the government's fiscal capacity. To avoid an unsustainable debt path, the fall budget must present a credible plan that explains how defence expenditures will affect the government's finances over time — and not rely solely on borrowing.