Prime Minister Mark Carney makes a defence and security speech standing alongside Chief of the Defence Staff Jennie Carignan, left, and National Defence Minister David McGuinty at Toronto’s Fort York Armoury in June.Arlyn McAdorey/Reuters
Todd Hirsch is a Calgary-based economist, author and public speaker. He is also the director of the Energy Transition Centre.
No sooner had Canada committed to immediately meeting NATO’s long-standing target of spending 2 per cent of GDP on defence – an increase of $9.3-billion annually – than the goalposts shifted. Dramatically.
At last week’s NATO meetings, a new benchmark emerged: 5 per cent of GDP. While 1.5 per cent of that could include spending on cybersecurity, infrastructure and defence-related technology, the overall target is a staggering $50-billion increase.
How can the government meet the new spending obligations? The reality is that there is no single way to do this. It cannot solely be a tax increase, a spending reduction or more borrowing. No one path can sustain the magnitude of the additional $50-billion alone without breaking the system.
If Canada is to meet its increased NATO obligation, it must be a combination of all three. And it’s time to be more creative than perhaps we’ve been in the past – even if it breaks a few taboos of public finance.
Here’s a practical three-pronged approach.
1. Spending reductions: The “Shared Sacrifice Plan”
Roughly 80 per cent of Ottawa’s annual budget is spoken for – locked into transfers to individuals (such as Old Age Security and Employment Insurance), payments to provinces (for health care and education) and interest on the debt. Only about 20 per cent is what might be called “discretionary” or operating spending.
That operating budget is about $90-billion. Sure, there’s always room to trim, but claiming that more than half of the operating budget is “waste” is unrealistic.
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It’s time to implement what could be called the “Shared Sacrifice Plan” of a 1-per-cent cut across every federal program – no exceptions. That would include OAS, EI the Canada health and education transfers to the provinces, equalization payment, the CBC, Parks Canada, and even federal prisons and the judiciary. (The only portion that cannot be reduced is, of course, debt servicing.)
Talk about breaking taboos! Every department will argue that they need more funding, not less. But surely a 1-per-cent cut could be absorbed without too much pain. (And in fact, the whole exercise would still result in some increased funding, just 1 per cent less than what the increase would have been in absence of the plan.)
Spread evenly, such a measure avoids political favouritism and could save about $5-billion. It’s not enough, but it’s a start.
2. Increased revenue: Close the tax gap
No one wants to hear about higher taxes. But there’s another option: collect more of what is already owed.
According to a 2021 Canada Revenue Agency report, an estimated $18-billion to $23-billion in taxes goes uncollected each year. That’s 7 per cent to 9 per cent of total federal tax revenue. (And that was based on 2014–2018 data; the gap is likely larger now.)
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This “tax gap” stems from a mix of tax evasion (illegal), honest filing mistakes (also illegal, though not always unethical) and unpaid taxes due to bankruptcies. None of it is easily fixed.
Still, modern tools – artificial intelligence, better technology, stronger enforcement – could help. If the federal government could shrink the gap by even half, it could generate an extra $10-billion to $12-billion annually. Now we’re starting to see the needle move.
3. Debt – with a purpose
The final prong of the plan is borrowing more money. That sounds ominous, especially given the size of our existing federal debt. But there may be a smarter way to do it.
During the Second World War, Canada issued Victory Bonds: government-backed investments with a defined purpose, timeframe and return. Why not revive this concept?
Imagine a new series of “Canadian Sovereignty Bonds,” or even something cheekier such as “Elbows Up Bonds.” The idea is to invite Canadians to lend to their own government for a clearly defined mission: defending our sovereignty and meeting our global commitments.
Yes, it’s still debt. But it’s transparent, purposeful debt. And it might even stir a sense of pride or duty in Canadians who want to be part of a larger national effort.
There is no simple, painless solution to meeting NATO’s new 5-per-cent target. Spending cuts will be unpopular, even if minimal. Squeezing more tax revenue is still leaving Canadians with less money, even if it is legitimately owed. And borrowing more is still debt accumulation, no matter what you call the program.
Combining all three is the trick. With a little imagination and a lot of political courage, could get us to our new NATO commitment eventually.