Walking a fine line: Economists caution Canada on commitment to defence sector

Prime Minister Mark Carney, centre, and Chief of the Defence Staff Gen. Jennie Carignan, right, walk on the tarmac of Canadian Forces Base (CFB) 8 Wing Trenton in Trenton Ont., on Friday, Aug. 8, 2025. THE CANADIAN PRESS/Spencer Colby

Prime Minister Mark Carney’s promise to boost defence could deliver massive profit gains for companies but the big question is, where will the money come from?

The Carney government recently announced plans to raise Canada’s military budget to $150 billion by 2035 to meet a new NATO target of five per cent of GDP, the country’s largest increase since the Second World War.

The current budget sits at $62.7 billion after Ottawa added $9 billion this year. Some economists are skeptical about Canada reaching its target.

“To increase this defence spending to the level they’ve committed to will ultimately lead to larger deficits unless they reduce spending elsewhere or raise revenues,” Randall Bartlett, deputy chief economist at Desjardins told BNN Bloomberg in an interview.

Carney stated military investment will be funded through a combination of accelerated government spending, prioritized domestic manufacturing, and aligned portions of the investment with existing or planned resilience-building initiatives.

Bartlett thinks it will be difficult for the government especially as Canada has struggled to reach two per cent of GDP on defence.

Researchers at the conservative think tank Fraser Institute outline three options: raise taxes, borrow money, or cut spending in other areas. Without these, Canada’s deficit, which is already projected at $65 billion this year could climb, eroding investor confidence.

“They’re going to have to make a tough decision one way or another,” Jake Fuss, director of fiscal studies for the Fraser Institute told BNN Bloomberg in an interview.

“People generally don’t like when you reduce spending, people don’t generally like when you raise taxes.”

Companies look forward to funding

MDA Space, a Brampton-based aerospace company, which already works with the government, says additional contracts will give business a major boost, which is necessary for Canadian companies.

“I think the commitment to spend more on defence is excellent,” Mike Greenley, CEO of MDA Space told BNN Bloomberg in an interview.

“It was a precondition, I feel, for overall Canadian trade and export globally that Canada carry its weight and do its part in overall defence of not only our country, but in our participation with allies.”

Publicly traded defence companies, like MDA Space, Bombardier, CAE Inc. and Calian, are also well-positioned to capitalize through government contracts.

“We have over a $20 billion pipeline of opportunity over the next five years, which is global in nature and highly commercial,” said Greenley.

Where could the funding come from?

The Fraser analysis states the government could raise taxes but that inhibits economic growth and the prosperity of Canadians by reducing the incentives to work, save, invest, or start a business.

Another option is borrowing, which the Fraser Institute states can burden future generations with debt repayment, likely through eventual tax hikes.

“The government needs to move away from borrowing or tax hikes and instead reprioritize spending,” said Bartlett.

There could also be cuts to social service programs. Researchers suggest the government could cut spending in national dental care, pharmacare and daycare to defence.

Further savings can be found by reducing the number of bureaucrats, eliminating corporate welfare and dropping electric vehicle subsidies.

Carney has said any reduction of the size of the federal public service will “happen naturally through attrition.”

An expanded defence budget may lift military contractors but strain the broader economy.

Investors will watch Budget 2025 for clues on how Ottawa plans to finance the buildup, and which sectors emerge as winners or losers from Canada’s massive defence expansion.