08:53 AM EDT, 05/28/2025 (MT Newswires) -- Protected by distance from likely foes on its home turf, Canada is at the bottom end of the defense spending spectrum globally, having spent only 1.4% of gross domestic product on defense in 2024, joining seven other NATO countries that are currently undershooting the 2% of GDP target that NATO mandates, said CIBC.

Canada's defense spending peaked at over 7% of GDP early on in the Cold War, in 1953. Military spending fell gradually from there to a more sustainable level of just over 2% by the mid-1980s, wrote the bank in a note to clients. The decline to below the 2% target started in the 1990s under the Chretien government and continued under the Harper government, with total defense expenditures

decreasing to just a hair above one percent of GDP starting in 2000, with the average annual level relatively stable around there since then.

As a result of those periods of consolidation, the size of the Canadian Armed Forces has fallen by more than

40%, pointed out CIBC.

However, Canada's underinvestment in defense goes beyond spending, stated the bank. In addition to the 2% of GDP mandate, NATO members pledge that at least 20% of that spending will go towards new equipment purchases. Canada is underperforming on that measure as well.

Estimates of Canada's GDP multipliers tied to defense spending vary heavily based on the type of spending and the time from implementation. Statistics Canada's input-output model shows that type 1 multipliers, which only consider direct and indirect impacts of investment, range from 1.66 for capital expenditures

to 1.45 for operational expenditures, although these don't take into account the offsetting drag if funded from either higher taxes or reduced government spending on other things.

That captures the immediate boost to activity from investment, but not the positive spinoffs down the line in the form of higher consumption tied to job creation in defense-related fields. When those impacts are added in, capturing the feedback between wages and production, the operational multiplier increases to 2.00 and the capital multiplier rises to 2.17, meaning that over the longer term, there are greater economic

benefits tied to capital spending on defense versus operational, and the total positive impact on economic activity is at least double what is directly invested initially, noted the bank.

The impact would also be amplified in today's economy, where there is substantial economic slack, which would help to prevent crowding out. This means that the $31 billion that the ruling Liberal party in Canada has earmarked for additional defense spending into fiscal 2028/29, which is 56% operational and 44% capital investment, could boost Canada's economy by up to $64 billion.

But that $64 billion figure should be put in perspective, added CIBC. If the spending is financed by higher taxes, the multiplier effect will be notably smaller. Even debt financing will potentially work to reduce the size of that multiplier via higher long-term rates. To the extent that the increase in defense spending comes at the expense of other programs, Canada will lose the positive impact of the multipliers associated with those programs.

Simply put, increased military spending isn't ideal, but if it's a given due to political circumstances, it's good to know that the defense multiplier comes with a positive sign attached to it, concluded CIBC.