{"id":3082,"date":"2025-06-13T12:00:00","date_gmt":"2025-06-13T12:00:00","guid":{"rendered":""},"modified":"2026-03-31T18:46:37","modified_gmt":"2026-03-31T18:46:37","slug":"what-does-greater-defence-spending-mean-for-canadas-economy","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/canadian-analysis\/featured-analysis\/insights\/what-does-greater-defence-spending-mean-for-canadas-economy\/","title":{"rendered":"What does greater defence spending mean for Canada\u2019s economy?"},"content":{"rendered":"\n
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A NATO laggard no more\u2014is the message the federal government revealed on Monday when it announced a big increase in defence funding for the 2025-26 fiscal year.<\/p>\n\n\n\n

The move will see Canada meet the 2% NATO spending target it agreed to work towards almost two decades ago in 2006. Yet, Canada\u2019s relief may not last long. In two weeks, it looks likely that the NATO summit will start negotiating new targets in the 3%-plus range.<\/p>\n\n\n\n

It has us wondering what billions of new defence dollars mean for the economy\u2014including the government\u2019s bottom line. Here are 10 key factors to consider.<\/p>\n<\/div>\n<\/div>\n\n\n\n

1. Where does Canada stand right now with the NATO target?<\/h3>\n\n\n\n

NATO members committed to spend 2% of gross domestic product (GDP) each year on defence and 20% of total spending on major equipment purchases as of 2014. Eligible spending and GDP estimates are defined by NATO.<\/p>\n\n\n\n

For 2024, Canada is estimated to rank 27th out of 31 NATO countries on defence spending as a share of the economy at 1.37%, and one of eight countries below the target. It would be the lowest among G7 NATO members, and considerably behind Russia-adjacent states like NATO spending leader Poland. Canada\u2019s major equipment share of spending hovers just below the 20% target.<\/p>\n\n\n\n

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2. How much new spending has Canada committed?<\/h3>\n\n\n\n

Spending planned in last year\u2019s defence strategy update, <\/a>Our North, Strong and Free: A Renewed Vision for Canada’s Defence<\/em><\/a>, would raise Canada\u2019s NATO spending to 1.76% of GDP by 2029-30 en route to the prior government\u2019s commitment to meet 2% by 2032. This was based on NATO-mandated GDP calculations, which differ from both RBC\u2019s current and 2024 forecasts.<\/p>\n\n\n\n

The current government\u2019s election platform advanced that timeline to 2030 with proposed incremental NATO spending of $46.4 billion over five years1<\/a><\/sup>. Major equipment purchases would ramp up to over 30% of spending.<\/p>\n\n\n\n

Now, the feds are completely changing the script with the June 9 announcement of $9.2 billion in additional funding in the current fiscal year that would take Canada\u2019s spending up to the 2% target. The announcement only included new funding for 2025-26, but maintaining 2% spending going forward would require about $62 billion in incremental defence spending over the next five years (including 2025-26).<\/p>\n\n\n\n

However, it\u2019s important to keep in mind that plans can change and even multi-year funding strategies could look different from dollars actually spent.<\/p>\n\n\n\n

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3. Where will defence dollars be spent?<\/h3>\n\n\n\n
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The type of spending matters greatly for its economic impact.<\/p>\n\n\n\n

The Department of National Defence budget\u2014about 80% of Canada\u2019s NATO spending\u2014has historically been fairly consistent in allocating 50% of spending to personnel, 25% to operations and readiness, 20% to capital and 5% to infrastructure2<\/a><\/sup>. This composition will likely shift with the planned scale up in major equipment purchases.<\/p>\n<\/div><\/div>\n\n\n\n

Last year\u2019s defence strategy, the Liberal Party platform, and recent announcement emphasize sustaining Canada\u2019s existing military assets, investing in new equipment and capabilities, and growing the defence production industry. Reports have highlighted a large share of unserviceable Canadian Armed Forces (CAF) equipment\u2014including only one in four submarines being seaworthy. The CAF is also almost 16,000 members short of its authorized target strength and recruitment is a challenge, making personnel-focused measures a key focus.<\/p>\n\n\n\n

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4. What are the short-run economic multipliers for defence spending?<\/h3>\n\n\n\n

Defence services\u2014which largely represents operating expenditures\u2014has a total GDP multiplier somewhat higher than the economy-wide average and is on par with many other service sectors. Multipliers measure the ripple effects across the economy from a change in spending or activity in a sector.<\/p>\n\n\n\n

Construction investment, machinery and equipment (M&E), and intellectual property (IP) largely cover capital spending. Multipliers vary with IP being the highest, while M&E is the lowest, given its high import content. Overall, these defence GDP multipliers are higher than for the private sector, on average, as are defence jobs multipliers.<\/p>\n\n\n\n

These multipliers offer only a partial view. They\u2019re a static snapshot of the economy and don\u2019t factor in opportunity costs. The supply-demand balance in the economy also matters significantly, because it determines whether additional spending adds net new activity or crowds it out from other areas. A weak Canadian growth outlook the next couple years is favourable for defence spending to have a stimulative effect.<\/p>\n\n\n\n

Importantly, multipliers are a short-run concept. Investing in M&E often makes sense even with a lower multiplier, because it adds to the capital stock. Similarly, it\u2019s essential to think about the long-term productivity of defence spending.<\/p>\n\n\n\n

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