TORONTO — The federal government may need to consider increasing the Goods and Services Tax (GST) and slowing the growth of non-defence spending to finance a significant rise in Canada’s military budget, according to a new report from the C.D. Howe Institute.The report, authored by Colin Busby and Nicholas Dahir, states that “some combination of tax increases, spending cuts, or taking on more debt is required” to meet future defence commitments.The analysis indicates that Canada’s plan to raise defence spending to 5% of gross domestic product (GDP) by 2035 will require what it describes as “hard fiscal choices,” including possible GST increases and tighter limits on non-defence programs.Released Thursday, the report projects annual defence spending will rise from just over $60 billion in 2025–26 to nearly $150 billion by 2034–35. At that level, defence spending would be comparable to the major transfers the federal government provides to provinces each year.The analysis suggests that a two-point increase in the GST could generate approximately $25 billion in additional federal revenue in 2025–26.The authors warn that without policy changes, higher military spending would lead to increased federal deficits..The report also highlights broader economic pressures, including weak productivity, slow economic growth, an aging population and elevated federal debt, which it says limit the government’s flexibility to expand defence spending without additional revenue or borrowing.According to the authors, a combined approach involving moderate tax increases, including a potential GST hike, along with restrained growth in non-defence spending, would provide a more sustainable path.“A mixed approach that combines a modest GST increase with slower growth in non-defence spending offers a practical path to meeting NATO commitments while maintaining fiscal sustainability,” the report states.Canada recently met NATO’s benchmark of spending 2% of GDP on defence. In 2024, under former prime minister Justin Trudeau, Canada spent 1.5% of GDP on defence, placing it among several countries below the alliance’s target at the time.The report concludes that while there is broad political agreement on the need to strengthen Canada’s military, meeting the higher spending target will require fiscal decisions that governments have postponed for decades.
