Canada has been a member of the North Atlantic Treaty Organization (NATO) since its inception in 1949. The purpose of NATO is to “guarantee the freedom and security of its members through political and military means.” The Government of Canada states that NATO is a “cornerstone of Canadian security and defense policy.”

There are two defense spending guidelines agreed upon by all member nations. The first is to set their total annual military expenditure to at least 2% of GDP, and the second is to spend at least 20% of military expenditure on new equipment. NATO observes that the motivation for these goals are to both demonstrate the overall military readiness of the Alliance to fulfil its objectives and the capacity of member states to demonstrate their “political resolve.”

As of the most recent report by NATO on the defense expenditures of member nations, Canada has not met and is not projected to meet either guideline in the 11 fiscal years spanning 2014-15 to 2024-25.

NATO defines total military expenditure as: “payments made by a national government (excluding regional, local and municipal authorities) specifically to meet the needs of its armed forces, those of Allies or of the Alliance.” This has the following footnote: “For the purposes of this definition, the expression “of the Alliance” is considered to consist of NATO common funding and eligible NATO-managed trust funds”. For Canada the Canadian Armed Forces (CAF) and the Department of National Defence (DND) fall under this definition, as well as portions of Veterans Affairs Canada. Pertinent portions of other forces may be included given that those forces have been trained in military tactics and equipped appropriately such that they may be deployable outside of the nation alongside the armed forces, such as elements of the Canadian Coast Guard. Some expenditures related to the armed forces and national defense are explicitly excluded under NATO’s definition. These include expenditures for civil defense, civil preparedness, and payments by subnational units of government among others.

PBO’s forecast of Canadian military expenditure under NATO’s definition consists of 2 components: Expenditures on Major Equipment, and Expenditures on all other categories (Other). Expenditures on other categories takes the 2023-24 amount from DND and forecasts it using PBO’s nominal GDP growth. Major Equipment is estimated using the annual capital expenditure profile of DND adjusted for the historical ratio between DND capital expenditures and Major Equipment expenditures under NATO, as well as a 25% gap applied between DND’s planned and actual annual capital expenditures. PBO applied a 25% gap between planned and actual capital expenditures as it represents the lowest annual gap since the application of Strong, Secure, Engaged (SSE) in 2017-18. PBO chose this gap assuming that both the conflict in Ukraine and the strengthened political resolve of NATO member nations will lead to additional efforts to adhere to planned capital expenditures.

PBO forecasts that Canada’s military expenditures will rise from 1.29% of GDP in 2024-25 to a peak of 1.49% of GDP in 2025-26 before falling and stabilizing at 1.42% by 2029-30. This represents $39.0B in 2024-25 rising to $52.2B in 2029-30. While the first guideline of total annual military expenditures being at least 2% is forecasted not to be met, the second guideline of at least 20% of military expenditures for major equipment will be met (and exceeded) under PBO’s scenario starting in 2025-26.

The difference between PBO’s and DND’s forecast is mainly due to two factors. First PBO’s projection of Major Equipment expenditures is lower than that of DND since recent experience as well as multiple PBO reports suggest a high likelihood of delays and lapsed appropriations. Second DND’s forecast uses the OECD’s outlook for nominal GDP in line with NATO’s publications on military expenditures. PBO instead uses its own outlook for nominal GDP, which is broadly similar to the Department of Finance’s.