Canada’s Defence Industry

Highlights

• The federal government recently announced it will reach the North Atlantic Treaty Organization’s current 2% of GDP target for defence expenditures by the end of this fiscal year.
• While this seems ambitious, NATO members may agree on a revised target of 3.5% of GDP after next week’s NATO summit in The Hague. A 5% target has also been put forward.
• We don’t think the federal government will be able to reach the 3.5% of GDP target by 2030. Unless spending is cut elsewhere and/or revenues are increased to fill the fiscal hole, gradually increasing defence spending to that level by the 2029–30 fiscal year would push the federal debt-to-GDP ratio higher in every year of the 5‑year forecast (graph 1).

• Despite decades of underinvestment in Canadian military capacity, Canada’s domestic defence industry is sizeable and growing. It represents 36,000 direct jobs, with an additional 25,200 jobs among suppliers in the value chain.
• We expect increased military spending to yield significant positive spillovers to Canada’s defence industrial base and suppliers in the value chain. One dollar of defence spending leads to $1.2 in nominal GDP once direct, indirect and induced effects are accounted for. The domestic defence industry will have the opportunity to leverage Canada’s leadership in artificial intelligence (AI) research, as well as its expertise and highly skilled workforce in key areas like cybersecurity, quantum computing, optics and photonics, advanced materials and drones.
• Given the heightened security threats and fiscal constraints that Canada is facing, we’ve identified two short-term and two longer-term recommendations. Streamlining defence procurement processes is an essential prerequisite to unblock the critical path to more timely equipment upgrades. Another low-hanging fruit would be shortening application processing times for new military recruits. To build long-term foundations, the government will need to invest decisively (and sufficiently) in modern and relevant equipment on a continuous basis. It will also need to execute a coherent defence strategy that diversifies alliances and better aligns defence and civilian goals.
• That being said, a healthy dose of realism on costs and timelines is in order: diversifying away from the United States presents massive interoperability challenges and cost increases, not to mention strategic dilemmas given our historical bilateral security partnership and shared border.