Beyond the 2% Threshold: Optimizing Canadian Defence Spending

Stephen Saideman, Lagassé, & Yves Giroux

Stephen Saideman, Philippe Lagassé, and Yves Giroux discuss Canadian procurement and defence spending. They explore NATO’s 2% of GDP target, its limitations, and the challenges of addressing specific threats. Canada’s unique circumstances, proximity to the United States, and involvement in collective defence add complexity to the analysis.

They also discuss the impact of delays regarding the defence policy update, improving fiscal transparency, managing procurement demands on the domestic defence industry, and enhancing the effectiveness of the ITB policy. Saideman and Lagassé reflect on whether the 2% target is too simplistic and emphasize the importance of international involvement and better allocation of existing funding.

Philippe Lagassé

Considering that Canada is the 14th largest spender on defence, are we truly lagging behind in defence spending? Or do you think it’s more a question of effective allocation and prioritization of existing funding? Are we overly concerned with comparing ourselves to other countries despite our unique circumstances?

When it comes to defence spending, and whether we’re spending enough, it really depends on what question we’re asking and what measure we’re using. The 2% of GDP is a measure that’s useful for comparing relative effort. That’s why it makes sense to use it within an alliance context. It’s not very refined, it doesn’t capture qualitative contributions and doesn’t measure the quality of the capabilities that you have. What it does measure is, relative to what you could be spending, are you spending on par with what the alliance considers to be your ability? It’s a rough measure of whether your effort matches that of your allies.

Whether it’s enough for Canada is an entirely different question. If you’re looking purely at the threats that you’re facing as a country, and how you’re responding to those threats, the 2% threshold may not be the best measure at all. You may need to look at what capabilities you need to meet the threats that you’re facing and then link your spending to your capability requirements and the threat environment you’re in. In Canada, as many commentators have noted, because we are next to the United States, we can free ride when it comes to a lot of our defence concerns.

Similarly, as a number of critics of the 2% threshold have noted, there are a number of technologies, such as intercontinental ballistic missiles that render an assessment of defence spending based on actual threats very difficult in the Canadian context. The threats that we’re facing are more or less existential on a conventional level, they may be less apparent, ad even more importantly, we don’t tend to think of Canadian defence purely in terms of defence of Canada. Rather we think of defence either through collective defence in NATO, collective security through the United Nations, or coalitions of the willing with the United States. That further skews the analysis because, in a Canadian context, we’re often not just talking about how much we need to defend ourselves, but how much we need to be a good ally.

What challenges does Canada face in meeting the 2% threshold? What are the potential consequences of not meeting it when it comes to Canada’s credibility within NATO, and its ability to contribute meaningfully to collective defence?

The biggest challenge for Canada is that we have an ideological issue, namely, the current government. Since 2015, the Liberal Party has been willing to have large deficits, and they measure our ability to pay the national debt based on the debt as a portion of gross domestic product. Therefore, they are more inclined to spend at the federal level, including running deficits and seeing the debt grow, provided the debt as a portion of GDP doesn’t become too expensive.

In recent memory, you’ll have conservative parties that tend to say they are in favour of spending more on the military, but they also tend to want to reduce the deficit and pay down the debt. That’s where it’s much harder circle to square. Namely, how do you go about reducing the deficit and reducing the national debt, while at the same time increasing defence spending? It’s not that you can’t do it, but that you either have to consider cuts to other programmes that are very popular with Canadians and that bring a degree of harmony with the provinces, or you increased taxes, which isn’t particularly popular with Canadians or the Conservative party.

Other countries with large debt-to-GDP ratios are willing to move ahead with increased defence spending, in spite of their debt, but we’ve tended to be more cautious since the early 90s, on account of the fact that our financial situation brought us into a very precarious situation on the international scene.

In the context of Canada’s fluctuating defence spending, what are the primary historical trends and patterns that we can observe in terms of resource allocation? How does the current government strategy align or deviate from these trends?

Canadian defence spending spikes during crises or wars, but there’s been a steady pattern of declining spending once the crises pass or stabilize. Since the 1970s, there’s been quite a bit of scepticism about how much one should spend on Canadian defence. The reality is that Canadian defence spending rarely makes it above 2% since the 1970s and that is even at a time when most of our allies are spending well above that. That downward slope has been seen across the alliances, but in the Canadian case, I think it’s important to recognize that we don’t have a political culture right now that would sustain that kind of spending. You always must be mindful of the fact that you may spend more now, but you may be setting yourself up with a force that you may not have the funds to sustain. You only need to look at the cuts in the 1990s to see what happens when you build up a force that you can’t sustain.

What are the key national security threats and challenges that we face today? How does the current level of defence spending align with addressing those threats effectively? How can we optimize our spending to address the most pertinent challenges?

I think Russian aggression in Europe is the clearest threat at the moment. One could argue that the way that we are addressing it through training and assistance to Ukraine has proved effective. The deterrence posture that we have in other allied countries is sufficient to contain that threat. Now, as time goes on, and the underlying weakness of the Russian military apparatus becomes more evident, does that actually, ironically enough, lend in favour of saying the best way to contain Russia is to assist border states, train them, equip them, and not spend yourself? You could spend on other things. I know that sounds callous, but when you’re calculating how best to spend, that may come into the equation.

When it comes to the Pacific, you have a bit of a similar calculation for Canada, where the largest threat is Chinese aggression, most notably against Taiwan potentially. In that context, what level of Canadian defence spending would be materially important in that fight, in the opening salvos, since it would likely be decided quickly? The Canadian contribution to that is likely more of a deterrence posture. That may be more about reallocating resources from the Atlantic theatre to the Pacific, or potentially acquiring some new capabilities that would bolster the deterrent in the Pacific.

We haven’t thought that through yet. We haven’t really seen a Canadian contribution or what that would look like. We first need to have that discussion. If you are going to ask what the main threats to Canada are, you’re going to point to things like cyber, you’re going to point to critical infrastructure, you’re going to point to resources in the Arctic. That would all tend to lead you to greater spending on a wider variety of national security threats that may or may not be national defence per se. And yet again, the conversation is we need to do all of this, as opposed to trying to have a more sober look at how much we’re actually going to spend and what’s the best use of the additional dollars.

In a North American context, obviously, working with the United States is key. But one concern that others and I have had over the decades is: should you be a little bit more specialized? Is it realistic to think that Canada can successfully contribute to North American defence, the defence of Canada, the defence of Europe, and international peace and security, while still spending around 1.5% of GDP on defence? That seems to be overly ambitious for what we’re actually spending.

What is the overall effectiveness of the existing structure of defence administration in Canada, considering the role of senior officials in formulating defence policy and keeping the military accountable to civilian authority?

At the end of the day, this is a problem that ultimately resides with ministers. The ministers and cabinet are the ones that ultimately approve the policy that then provides guidance to the military to articulate requirements, and to the various civilian officials and departments to implement. If there’s a misalignment between what ministers say they want to do and how much ministers are willing to spend, ultimately, that is something that politicians and ministers need to own up to. Otherwise, they’re putting their officials in an impossible position.

I’m not going to say that the armed forces and officials are totally innocent here. If you’re within the officialdom, then it often makes sense to get policy cover for a project. Sometimes there is a bit of an incentive to downplay the actual costs involved in acquiring a capability, just because you want to move it forward—downplay the cost in order to get approval. Once it’s in the system, eventually the money will come. That can work sometimes. The Canadian surface combatant is a good example of that. Thus far, it doesn’t seem that the current government is reconsidering the number of ships it’s going to build, in spite of the fact that the costs of the programme are increasing, and the actual maintenance costs are unclear.

With the future fighter, not only did the current government commit to spending on the capability, but they went from an initial idea of acquiring six fighter aircraft under the previous government to eighty-eight. There’s often an understandable view within the department and within the forces, that as long as they stick to the capability requirement, the money will be forthcoming. But I would implore ministers and others to take a far more sober look at how much things actually cost at the end of the day. There’s a lot of talk about the fact that SSE was fully costed, but was it really? I don’t think we can say that with a great deal of confidence. It may have been fully costed to the best of our abilities at the time, but I think it’s proving to be more expensive, certainly for the long-term costs to Canada, than we’re willing to acknowledge.

I would encourage people to think about why we are where we are. Canadians want everything all at once. We don’t want to see failure of any kind when it comes to defence procurement. And yet we complain when the system is rigid and risk-averse. We want to spend more on defence, but we also want our taxes low. We want social spending. We demand accountability, yet we are unwilling or averse to hearing the truth from our elected officials. We run after scandals and crises and never give officials that are running the system any grace. Even amongst academics and pundits, we’re always willing to lob rocks and stones without ever considering how that complicates the very procurement system that we’re attempting to improve. We have our own part to play in this as observers and commentators. I don’t think we would appreciate that enough.

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