According to a new report from the National Bank Financial (FBN), although many details have not yet been revealed, Canada’s new commitment to greatly increase its defense expenses could have significant consequences on public finances and the issue of bonds.
At the start of the year, Canada promised to bring its defense expenses to 2 % of its GDP. However, following the last NATO summit, this objective was revised upwards to reach 5 %.
“Other details will appear, but it seems that this will involve spending 3.5 % of GDP for” essential “defense categories and 1.5 % of GDP for” adjacent to defense “elements (for example, infrastructure, investments in cybersecurity)”, analyzes the FBN.
It is also not known when the 5 % objective must be achieved or how Canada – and other NATO members – intend to pay for the increase in expenses.
In this context, the FBN said it is likely that these new expenditure commitments will require the issue of more than $ 1,000 billion in the world’s world market markets.
According to the National Bank of Canada, “tax pressures are increasing rapidly” for the country. If part of the military spending is already integrated into budgetary forecasts, the report stresses that direct defense expenses “still leave a big void to fill.
“In the end, it is the pace to which Ottawa will increase to 3.5 % that will dictate the sums deployed,” added the report, specifying that a gradual increase from 2 % to 3.5 % “could represent an additional $ 60 billion over five years”.
Unless you opt for an increase in taxes or cuts in expenses, the Canadian government will have to resort more in the issue of debt securities to finance the increase in military spending. According to the report, “the increase in bond supply in Canada, combined with global budgetary expansion, establishes a higher floor for long -term yields and could exert pressure on credit ratings”.
