New NATO pledges to pressure Canada’s finances

While many details are still to be revealed, Canada’s newfound commitment to sharply ramp up defence spending may have significant implications for government finances and bond issuance, according to a new report from National Bank Financial Inc. (NBF).

Earlier this year, Canada promised to increase defence spending to 2% of GDP — now, following the latest NATO summit, it’s expanding that commitment to 5%.

“More details will emerge, but it looks like this will entail spending 3.5% of GDP on ‘core’ defence categories with another 1.5% of GDP for ‘defence-adjacent’ items (e.g., infrastructure, cybersecurity investments),” NBF noted.

It’s also unclear when the 5% target must be reached or how Canada — and the other NATO members — intend to pay for the increased spending.

Against that backdrop, NBF said it’s likely these new spending commitments will require more than US$1 trillion of issuance in global debt markets.

For Canada, “fiscal pressures are mounting quickly,” NBF said.

While some of the “defence-adjacent” spending is already accounted for, the direct defence spending “still leaves a big hole to fill,” the report said.

“Ultimately, the pace at which Ottawa moves to 3.5% will dictate the dollars deployed,” it said — adding that a gradual ramp-up from 2% to 3.5% “could mean an additional $60 billion over five years.”

Unless there are higher taxes or spending cuts to finance the added defence expenditure, the government will need to issue more debt — adding, “… more bond supply in Canada (concurrent with a global fiscal expansion) means a higher floor on longer-term yields and potential credit rating pressure.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.