A new C.D. Howe Institute report warns that Canada may need tax increases or spending cuts to meet its defence commitments, including a potential rise in the Goods and Services Tax (GST) by one to two percentage points.
The analysis projects defence spending would need to increase significantly to reach 5% of GDP by 2035, with annual expenditures rising from just over $50 billion in 2025–26 to nearly $150 billion by 2034–35.
A two-point GST increase could generate approximately $25 billion in 2025–26, according to the report.
Without policy changes, the higher military spending would likely increase federal deficits, as Canada faces constraints from slow economic growth, an aging population, and high debt levels.
The report suggests a combination of moderate tax increases and slower growth in non-defence spending as the most realistic path to meeting NATO commitments while maintaining fiscal stability.
Canada has already met NATO’s 2% of GDP defence spending target, but achieving higher levels will require significant fiscal adjustments, the report concludes.
In a separate data release, Statistics Canada reported that the economy grew by 0.1% in January, supported by gains in goods-producing industries. Mining, oil and gas extraction led the increase, rising 1.2%, while construction also contributed with a 1.1% gain. The data suggests modest growth at the start of 2026, despite weakness in manufacturing and wholesale trade.
The manufacturing sector declined over the month, while wholesale trade also fell, partly due to lower motor vehicle exports and seasonal factors. Services-producing industries such as real estate, health care and finance were largely unchanged. Economists say the early-year data points to a slightly stronger-than-expected start to the year, though challenges remain as higher energy prices and economic uncertainty could weigh on growth in the coming months.
