Canada faces fiscal limits in meeting NATO's new 3.5% defence spending target
While most NATO allies reached the 2% spending target by 2025, Canada's higher government debt could constrain how much more it can borrow for defence increases.
Sources · C.D. Howe Institute
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Canada will face significant fiscal constraints in meeting NATO's newly increased defence spending target, even as most alliance members reached the previous 2% benchmark, according to analysis from the C.D. Howe Institute.
Canada fell below the 2% NATO defence spending target in 2024 but reached it by 2025, joining most other alliance members in hitting the longstanding goal. However, NATO recently increased its target to 3.5% of GDP—a substantially higher bar that will strain Canada's finances.
The challenge is Canada's relatively high government indebtedness compared to other NATO peers. "Countries' ability to credibly meet NATO defence spending targets depends on their fiscal position," the C.D. Howe Institute noted. "Canada's fiscal position will limit how much defence spending increase can be financed through additional borrowing."
While most NATO allies were below the 2% target in 2024 before moving above it the following year, Canada's debt levels position it above the average among the alliance. This means the government has less room to raise spending through new borrowing without risking fiscal sustainability concerns.
The analysis highlights a broader tension: as geopolitical threats intensify and NATO raises expectations, countries with existing debt burdens face difficult trade-offs between defence commitments and other fiscal priorities. Canada will need to navigate this balance as it works toward the 3.5% target in coming years.
