Funding the Five Percent NATO Commitment: What It Will Take to Finish the Job

April 2, 2026 – Having reached the 2 percent of GDP defence spending benchmark, Canada must present a credible financial plan to augment its military capabilities and meet its new 5 percent defence spending target, according to a new report from the C.D. Howe Institute.

In “A Steep Climb: Financing Canada’s NATO Commitment while Maintaining Fiscal Discipline,” authors Colin Busby and Nicholas Dahir highlight that increasing defence spending equal to 5 percent of GDP would dramatically change the federal government’s allocation of tax revenues and, under current policies, drive up the federal deficit and debt. Canada will need to make some hard fiscal choices if it is to preserve fiscal stability while meeting its commitment to its allies.

“Within a decade, federal defence spending could rival the largest areas of federal spending, including transfers to provinces for key social programs. The scale of this commitment will fundamentally reshape Canada’s federal finances,” says Colin Busby, Director of Policy Engagement at the Institute.

The report projects annual defence spending could approach $150 billion by 2034/35 on an accrual basis – roughly triple current levels – rivalling transfers to provinces and territories, marking a major reallocation of public resources. Yet current fiscal planning is inadequate: Budget 2025 does not set out a clear path to meeting the NATO target, and economic growth alone will not close the gap.

“There is no clear path to meet this commitment under the status quo,” says Nicholas Dahir, Research Officer at the Institute. “Absent policy changes, Canada will, in the next five years, face mounting deficits or face difficult trade-offs that cannot be deferred indefinitely.”

According to the report, no individual financing option is practical. Large tax increases, deep spending cuts, or heavy reliance on borrowing each carry significant economic and political costs.

The report presents a mixed approach. A modest increase in the GST and restraint in the growth of non-defence spending and provincial transfers offer a practical path to meeting NATO commitments while maintaining fiscal sustainability.

“Canada’s defence commitment is no longer aspirational – it is a constraint shaped by global realities,” Busby added. “Meeting it will require deliberate, thoughtful fiscal choices.”

Read the Full Report

For more information, contact: Colin Busby, Director, Policy Engagement, C.D. Howe Institute; Nicholas Dahir, Research Officer, C.D. Howe Institute; Raquel Schneider, Communications Officer, C.D. Howe Institute, 647-805-3918, rschneider@cdhowe.org. 

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

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