PBO Report: Canada Faces $63.7 Billion Deficit Increase to Meet NATO's 5% Defence Target by 2035
A Parliamentary Budget Office report warns that meeting NATO's new five per cent of GDP defence spending target by 2035 would require substantial and sustained increases, raising core defence spending to approximately $163.7 billion and adding $63.7 billion to the federal deficit. Details on financing are expected in the 2026 budget.
Canada must undertake "substantial and sustained" increases in defence spending to meet NATO's new obligation of allocating five per cent of gross domestic product to defence by 2035, according to a report by the Parliamentary Budget Office (PBO). 
To reach the five per cent target — which consists of 3.5 per cent for direct military spending and 1.5 per cent for defence infrastructure — core defence spending is projected to rise from $95.7 billion in 2030 to approximately $163.7 billion in 2035-36. CBC News reported a slightly different figure, projecting direct spending could reach $163.6 billion by 2035, a variance that may reflect rounding or differing definitions of "core" versus "direct" spending.
The PBO estimates that this additional core defence spending would increase the federal budgetary deficit by $63.7 billion, or 1.4 per cent of GDP, in 2035-36 relative to the status quo. Federal debt would consequently be 5.7 percentage points of GDP higher due to the increased spending.
Prime Minister Mark Carney's government is currently focused on earlier benchmarks. Canada is expected to hit the longstanding two per cent NATO spending target for the first time this year. To help meet that previous benchmark, Carney ordered the injection of $9 billion into defence last year. Looking ahead, Carney plans for Canada to reach an interim four per cent defence spending target by 2030, comprising 2.5 per cent in direct spending and 1.5 per cent in infrastructure.
Finance Minister Francois-Philippe Champagne stated that more details on defence spending measures will be presented in the government's 2026 budget. 
Parliamentary Budget Officer Annette Ryan cautioned that Canada's industrial capacity may not be able to meet the demand caused by such rapid spending increases. The PBO also highlighted risks associated with complex procurement projects and historical tendencies to delay purchases. Under previous governments, it was routine to postpone big-ticket equipment acquisitions, with over $18 billion set aside for military spending lapsing under the Trudeau government.