Why turning Canada's new defence spending into economic growth may be ‘easier said than done'

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2 days ago

The Liberal government announced a shift towards a Canadian defence industrial strategy on Monday, which has the potential to add jobs and grow the Canadian economy — but only if executed correctly, economists say.
'We will ensure every dollar is invested wisely, including by prioritizing made-in-Canada manufacturing and supply chains,' said Prime Minister Mark Carney during a speech in Toronto on Monday, where he announced Canada would be meeting its NATO two per-cent spending target. 'We should no longer send three quarters of our defence capital spending to America.'
The announcement included $9.3 billion in additional defence expenditures this fiscal year. The funding would go towards addressing immediate operational needs, with $2.6 billion in investments for the recruitment and retaining of personnel and $844 million to repair and maintain Canadian Armed Forces equipment.
But an additional $2.1 billion was also promised to 'strengthen' the government's relationship with the Canadian defence industry and re-orient a procurement strategy towards Canadian suppliers.
Goldy Hyder, president and chief executive of the Business Council of Canada, said he is hopeful this marks the beginning of a process that will both strengthen Canada's defence and grow the Canadian economy.
'It's going to require a lot of work,' he said. 'I think the government has been given a licence to put more emphasis on things like this, which have been neglected for too long.'
The plan included more investments in new submarines, ships, aircraft, artillery, and armed vehicles.
Carney said the investment in military capabilities could 'transform our economy' but acknowledged none of the goals set out in his plan will come easily or quickly, including reforming the department of national defence's procurement process.
The Royal Bank of Canada said the economic multiplier effects of the announcement in the short-run could be 'favourable' as the Canadian growth outlook is weak over the next couple of years and defence spending could help stimulate growth.
'Multipliers vary with intellectual property being the highest, while machinery and equipment is the lowest, given its high import content,' said RBC economists Cynthia Leach and Salim Zanzana, in a note.
In the long-run, Leach and Zanzana said empirical research on the effect of defence spending on growth has found both negative and positive effects.
'Positive impacts tend to arise through industrial development, innovation, and infrastructure channels,' they said. 'Negative impacts tend to stem from capital leakage, fiscal overspending and the risk of diverting resources from more productive sectors of the economy.'
The Canadian Association of Defence and Security Industries (CADSI), which represents 650 companies and directly employs 78,000 Canadians, welcomed the policy shift by the federal government but warned it will be for nothing if the procurement process does not change drastically.
'This is a heavy lift,' said Christyn Cianfarani, president and chief executive of the CADSI. 'This is a fundamental change in the culture of the public service that we're talking about.'
Cianfarani said Monday's announcement would be a shift to a more agile way of procuring, moving to a shorter timeframe of one to six months, from the current average of five to 10 years for major capital investments.
Jimmy Jean, chief economist at Desjardins Group, said Carney was right that Canada and other allies rely heavily on the United States for defence technologies and equipment.
The U.S. defence sector alone has 40 per cent of the global market, while the European industry is dominated by leading national champions, with many companies owned in part by the state. Carney said Canada will draw more from its European partners, by participating in the European Union's ReArm Europe program.
Right now, Canadian military exports are valued at $7 billion, which represents just one per cent of Canada's total exports of goods. CADSI said its companies generate $12.6 billion in annual revenues.
Advocates agree the way to drive innovation and growth in the defence industry would be to provide significant investments in research and development. To accomplish this, Carney promised to create a new entity called 'Borealis' to provide funding for cutting edge research in areas like quantum computing and artificial intelligence.
'The potential spin-offs from that in terms of new businesses and businesses that can export their technologies around the world, that's really where the money is when it comes to generating wealth out of this,' said Jean. 'But it's easier said than done, when you're competing against established players in industries.'
Robert Asselin, chief executive of U15 Canada, which represents 15 Canadian research universities, has long advocated for Canada to adopt a program similar to the Defense Advanced Research Projects Agency (DARPA) in the United States. DARPA's mandate is to make investments in leading technologies for national defence and security purposes, but the outcomes often have civilian applications as well and have been commercialized to the economic benefit of the U.S. and American companies. The internet, GPS and voice recognition software are among the technologies it has been credited with accelerating.
'From an economic perspective, technology is out to make our economy more innovative and more productive,' Asselin said. 'Generally, our leading research universities are so well-positioned for this because they already do very neat work in all these promising sectors.'
Canada has been a laggard on defence spending for over a decade and has faced pressure from its allies to increase its expenditures on its military. Canada spent 1.45 per cent of its GDP on defence in 2024-2025.
In total, the department of national defence will spend $62.7 billion for the 2025-2026 fiscal year, up from the previous estimate of $53.4 billion.
Desjardins said the new defence spending will worsen the deficit to roughly $65 billion for this fiscal year.
'Governments have to make choices,' said Hyder. 'You have to pay for these things; we have been calling for some time for program review, to find much of the savings that we think can be available to help fund some of the programs that are going to be necessary.'
Carney acknowledged that the geopolitical situation has changed and threats to Canada are more 'immediate and acute.' Last week, United Kingdom Prime Minister Keir Starmer announced his country will boost its defence spending to 2.5 per cent of its GDP by 2027.
Hyder said Canada is playing catch-up, as the NATO spending target, which was established in 2014, is set to increase later this month when leaders meet for this year's NATO summit in the Netherlands. The new target will be 3.5 per cent of GDP for core military spending and 1.5 per cent for defence-related investments.
Cianfarani said 'in theory' all these promises from the federal government should create more jobs in the industry but will wait for proper execution from the federal government.
'It's like any business, you can have great vision coming from the CEO, but the reality is the CEO doesn't execute,' she said. 'It's the machine behind the CEO that has to execute.'
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