By Paul Vieira

The Canadian government could face tough fiscal choices later this decade as it ramps up defense spending to meet commitments agreed upon by the North Atlantic Treaty Organization, Prime Minister Mark Carney said Wednesday.

NATO members formally pledged at a summit in The Hague to increase defense spending and security-related expenditures to 5% from gross domestic product, from the current 2% level, over a 10-year period. The increase is meant to address new threats posed by China, Russia and other states, and allay demands from President Trump that NATO members do more on the military front.

Ahead of the NATO summit, Carney said his government would accelerate defense spending in the current fiscal year to hit 63 billion Canadian dollars, or the equivalent of $45.9 billion, to reach 2% of GDP. This marks a significant increase from planned spending, as envisaged in earlier budget documents, and is aimed at shedding Canada's reputation among NATO allies as a laggard.

On the sidelines of the NATO summit, Carney said much of the proposed increase in spending will happen in Canada, and that would help boost economic growth. And defense-related spending would increase each year at a measured pace initially and pick up steam in later years.

Carney added that a review of expenditure plans is set for 2029. "Depending on how the threat environment evolves globally, and if we are moving to higher and higher levels of defense spending because that's necessary, then we will have to make considerations about what less the federal government can do in certain cases, and how we're going to pay for it," he said.

Previously, Carney said the government had no plans to raise taxes to help fund the defense-spending increase.

Bank of Nova Scotia economist Derek Holt said what's under consideration is government spending on defense of up to C$1.5 trillion over 10 years, and that could swamp the fixed-income market with bigger and more frequent bond offerings. "I suspect we'll see some combination of funding plans unfold with higher taxes, at least an attempt at containing operating spending growth, some asset sales, and more debt," he said.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

June 25, 2025 10:01 ET (14:01 GMT)

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