Canada may have hit the North Atlantic Treaty Organization (NATO) spending target of two per cent of gross domestic product (GDP) five years ahead of schedule, but reaching the spending target of five per cent of GDP by 2035 could require tough sacrifices from Canadians today, according to a new report from the C.D. Howe Institute.

“The main message is that in order for Canada to meet its NATO and

defence spending commitments, it is going to have to radically transform the way the federal government allocates funds,” Colin Busby, co-author of the report and director of policy engagement at the think tank, said. “This is going to be a major shift in its finances. There’s no free lunch. There’s no way of doing this without imposing costs and constraints somewhere in our financial structure.”

High debt levels, weak productivity , slow economic growth and an aging population mean Canada will not be able to accommodate the defence spending increases promised by the

Mark Carney government without “broader fiscal changes,” according to the report.

These include a “mixed financing approach” that could include a combination of a

GST increase, provincial transfer adjustments and non-defence spending restraint, Busby said.

The report said increasing the GST to seven per cent from five per cent would “create fewer distortions and be less harmful to economic growth” than increasing taxes on personal income and savings, given that Canada needs to boost productivity and growth.

Hiking the GST could also help ensure that funding is maintained for key services such as health care and education, Busby said, adding that a slower rate of growth in federal transfers to the provinces also needs to take place.

“We need to seriously think about if we should keep growing them at the rate of GDP, or if we could grow them slightly less than that so they can pick up a larger share of the tab for certain services and social programs,” he said.

C.D. Howe also said spending reductions should be spread across multiple areas to reduce the burden on any one program.

Focusing solely on debt financing is “inappropriate and undesirable,” Busby said, because it puts the onus of improving defence spending today on future generations.

“The benefits of improved defence accrue to Canadians today more than they accrue to Canadians in the future, so we just need to be very cautious about how much we want to use debt to finance this increase,” he said.

Defence spending could approach $150 billion annually by 2034 to 2035, according to the report, with that number mirroring the spend on major social and health-care programs.

“How we are going to pay for all this hasn’t yet been fully fleshed out,” Busby said.

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