Budgeting 101: Why NATO’s 2% is So Elusive

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For weeks now we have been hearing about the need for Canada to increase its contribution to NATO to meet the 2% expenditure goal set for member countries.[i] The arguments of military analysts for increased spending have been reinforced by the worsening situation in Ukraine, which has thrown much of Europe into panic mode. As a result this once obscure 2% target has become a highly visible and contentious political issue, especially following the incendiary comments of former American president Donald Trump that “Russia should do whatever the hell it wants” to any member states that “don’t pay their bills.” [ii] Although everyone from the president of the European Council to the head of NATO have pointed out that this 2% concept is a target, not a binding rule, (and one which two-thirds of NATO members do not meet), the discussion has become increasingly uninformed and divisive.

In Canada, none other than Conservative Party leader Pierre Poilievre quickly joined the chorus of critics decrying the country’s failure to pull its weight, demanding the Trudeau government increase its defence spending immediately. But Poilievre’s initial calls to meet the 2% target soon foundered when confronted with fiscal reality. With little fanfare he quietly withdrew from the debate, having been cornered by journalists about his own party’s position if he were to form a government. After replying meekly that he would only commit to “working towards meeting” the 2% objective, he has basically dropped the issue entirely. [iii]

Why the swift retreat? Those who have followed this Opposition Leader’s career will know that he is hardly one to back down in a fight. But every once in a while, even the man who was often described as former prime minister Stephen Harper’s ‘pitbull’ knows when he has bitten off more than he can chew. Remember his disastrous bitcoin advice? Perhaps not, since he has not mentioned it again since the whole cryptocurrency market went south. In this more recent case the likely explanation for his about face on the 2% claim is either (1) that Mr. Poilievre knew it was virtually unattainable, but called for it anyway just to make trouble, until he was hoist on his own petard by journalists’ questions, or (2) that he was blissfully ignorant of Canada’s fiscal situation until someone in his retinue explained the budgetary facts of life to him.

It’s hard to know which is worse for someone who has aspirations of leading the country. Certainly he should have known why this NATO target has been such a difficult proposition for successive Canadian governments, including that of Mr. Harper. After all, even the Parliamentary Budget Officer has weighed in on the issue in his publicly released report. That report notes, first of all, that spending under Mr. Harper had declined to 1% of GDP by 2014, and has since risen to 1.46% in 2023-4 under the Trudeau Liberals, with a further projected increase to 1.59% by 2026-7 based on nominal defence spending growth of 67 percent between 2014 and 2021. [iv] Put another way, the Trudeau Liberals have actually invested tens of billions of dollars in defence spending. But – and here is the crucial point — to reach 2% they would have had to spend an additional $18 billion in 2022-3, over and above their existing planned expenditures.

So, where to find an additional $18 billion? Given total federal expenditures are roughly $500 billion annually, this should not be too hard, right? Probably that is what Mr. Poilievre initially thought. After all, he started talking about small measures like cutting “wasteful” foreign aid to certain dictators, defunding some agencies like UNWRA and finding other “efficiencies” in a “bloated” and “corrupt” military procurement process. [v] 

Unfortunately for him, a few budget experts decided to take him at his word and calculate how much that would save. The answer, of course, is that it would amount to a few billion at most. As David Perry of the Canadian Global Affairs Institute pointed out, “Even if the Conservatives eliminated Canada’s entire foreign aid budget – about $6.9-billion per year – this would only yield roughly one-third of the funds needed to reach (nearly) $20-billion in additional defence spending. Mr. Perry added that reforming procurement could probably save a few billion dollars more, but “nowhere near enough to close the NATO gap.” Meanwhile the Director of the Centre for Defence and Security Studies (University of Manitoba) stated the problem with military procurement is “not waste and corruption but too few procurement specialists. We need people to review contracts continuously to catch problems as they begin and hold contractors accountable.”[vi]

Houston, we have a problem. If not these small measures, then what would we have to cut to find the necessary funds to reach 2%? This is where knowing exactly how federal government money is spent would come in handy.  To begin with, a huge amount of that $500 billion in federal spending is non-discretionary. Nearly half goes directly to citizens (25%: OAS/GIS/EI/Child Benefit) and provinces (20%: Canada Health Transfer and Canada Social Transfer). The latter are built-in, five-year arrangements and, as most Canadians know only too well, premiers are constantly clamoring for more, not less, federal funding in these areas. Equalization payments are also fixed, and are even constitutionally entrenched. At $24 billion this is not small change. Coupled with interest payments on the national debt, (roughly $47 billion), and other transfers like the ones to the three territories north of 60, the $500 billion is quickly reduced to about $125 billion in discretionary spending on the part of the federal government.

Since $30 billion of that lower amount is already devoted to military spending, Mr. Poilievre is left with some $95 billion to play around with in terms of cuts and savings to convert to defence spending. But that $95 billion is used to pay for the activities of all federal government departments and programs. Even if the Conservative leader were to eliminate two of his pet hobby horses, the entire Department of the Environment ($2.1 billion) and the CBC ($1.2 billion) he would still find himself some $15 billion short of his 2% objective.

Simply put, there are not very many realistic options, and none of them are politically palatable. Every department, and almost all of the programs within each department, serve a particular citizen interest. And what one person may consider dispensable another may consider essential. Of course another way out of this dilemma would be to raise taxes, but here the Conservatives are in real trouble, since their mantra has long been that there is no such thing as a good tax and in fact taxes need to be lowered, not raised. Does “Axe the Tax” sound familiar?

So what is a poor opposition leader to do? If you are Mr. Poilievre, who prefers to criticize and is highly averse to finding solutions, you fold your tent and fade into the night, looking for another hot button issue to pursue. Raise spending to 2% of GDP? Who said that?

[i] https://www.nato.int/cps/en/natohq/topics_49198.htm

[ii] https://www.cnn.com/2024/02/10/politics/trump-russia-nato/index.html

[iii] https://www.theglobeandmail.com/politics/article-poilievre-nato-target/

[iv] https://distribution-a617274656661637473.pbo-dpb.ca/2e61c150ee17ee7fc0594b3c01632c13ffb4dcb4d848b9f259a81a318d997a3c

[v] https://www.theglobeandmail.com/politics/article-conservatives-would-cut-foreign-aid-reform-procurement-to-fund/   

[vi] https://www.theglobeandmail.com/politics/article-conservatives-would-cut-foreign-aid-reform-procurement-to-fund/