The Decibel - How Carney’s historic defence spending could change the economy

Episode Date: July 22, 2025

Ottawa’s pledge to spend $150-billion annually on defence-related priorities by 2035 is creating big opportunities for the private sector. Several Canadian companies are preparing to compete for lucrative contracts as Canada aligns its defence spending with NATO allies.  Pippa Norman, who covers innovation for The Globe, explains the state of Canada’s defence sector, what industry leaders hope Prime Minister Mark Carney will change, and what this government’s focus on military spending could mean for the country’s economy and reputation as a peacekeeping nation. Questions? Comments? Ideas? Email us at [e-mail]

I was at Toronto Tech Week in June and there was these panels on defense in Canada. That's Pippa Norman, the Globe's Innovation Reporter. The expectations for the day the host told me was that there would be, you know, maybe 12 people at most who would sign up. Instead, they had more than 100 people register, and at least 50 more were left on a waiting list. It almost felt like a lot of the people in this room had been wanting to have this conversation, but weren't really sure where to have it or who to talk to.

The crowd was made up of investors, government officials, entrepreneurs, and bankers. And at one point, one of the speakers asked the audience a question. Who thinks that Canada will be at war in five years? And nearly half of the people in the room raised their hands. With ongoing economic threats from the U.S. and a shifting global order, Canadians are being confronted with the possibility that the peace we've enjoyed for decades is at risk.

In late June, Prime Minister Mark Carney committed to the biggest increase in Canadian defence spending since the Second World War. And for Canada's private sector, this means opportunity. Pippa and Globe reporter Nick van Prat looked into what the shift could mean for Canada's defence industry. Pippa joins us on the show today. She'll explain what this government's focus on military spending could mean for the country's economy,

social fabric, and place on the world stage. I'm Irene Ghalia, guest hosting The Decibel from The Globe and Mail. Hi Pippa, thanks for joining us. Thanks for having me. Ottawa recently committed to more than doubling defense spending by 2035. Let's get a sense of how much money we're talking about here. How big of a shift is this? It's a major shift. Initially, Carney pledged to raise our defense spending to 2% of our GDP to meet the existing NATO target that we committed to some years ago.

Canada was supposed to be spending 2% for years. It actually agreed to this goal in 2006. Yet in 2024, Canada's spend was estimated to be about 1.37% of our GDP. And so then, Carney committed to reaching that 2% goal. And then in June at the NATO summit, that target was then bumped again to 5% of our GDP by 2035. So that is now our new target. To do this, Canada will need to spend up to $150 billion annually, which means more than doubling our existing budget. Goran Pasek, who is the president of Ottawa-based Samuel Associates, who my colleague Nick spoke

to for this piece, called this a generational shift in Canadian defense policy. OK, so we're set to be spending 5% of our GDP annually by 2035. Can you give us some examples of what this money could go towards? Yeah, so there's all sorts of things that could go towards maritime sensors that could survey ocean traffic, it could go towards weapons, it could go towards infrastructure like upgrading or modernizing our military bases, it could go towards military aircraft, and it can also go towards training and kind of

the people themselves who make up our Canadian Armed Forces. So the spending will likely be a part of the Liberals' first budget, which is expected to come out in the fall in the House of Commons session that will begin in December. And we've already seen conservatives signal their support as well for that spending. Specifically, Poliev has voiced his support. Okay, and we should say that the 5% number is actually 3.5% of direct military spending and the remaining 1.5% could go towards some of the other things you've mentioned like infrastructure.

Yeah. Okay. So before we get into the logistics of this spending, could you explain why such a huge influx is needed? How did we get to a point where our allies think that we're not keeping up when it comes to defense? So we've seen this deprioritization of defense spending over decades in Canada. And it's worth noting that it's been done by both the liberal

and conservative parties of Canada. So you can kind of trace a through line, which is interesting. For example, in 1959, we saw Diefenbaker cancel the Avro Aero program, which was a cutting edge project that positioned Canada as a world leader in fighter jet technology. Then in 1993, we saw Chrétien cancel an overdue replacement

of Canada's Sea King helicopters. And then even more recently in 2015, Trudeau pledged to cancel a multibillion dollar purchase of 65 F-35 stealth fighter jets that were supposed to replace an aging fleet. Do we know why past governments deprioritized the growth or maybe even the maintenance of our defense capabilities? Yeah, the kind of

overwhelming sentiment in all of these decisions has been just a sense of shifting priorities and the cost to taxpayers. Most of these decisions, the government who made the decision said that it was just too expensive and it just wasn't something that we needed right now, essentially. For example, like Chrétien's liberal government thought of the seeking purchase as an unnecessary expense during a time of fiscal restraint. And Trudeau, for example, he wanted to opt for a cheaper alternative than the F-35s, therefore freeing up some more funds for Navy ships, he said at the time. And one of the people that we spoke to for this piece was former Conservative Party leader Aaron O'Toole. And he told me Canada was a laggard. And you know, our allies will tell you that but in this

moment we have the opportunity to be a leader after multiple generations of both liberal and conservative governments in Canada have undermined the sector. Are we the only country that's done this? Is Canada an outlier when it comes to deprioritizing military and defense spending? We're pretty low on the list when it comes to GDP spend on defense. For example, in 2024, only Belgium, Luxembourg, Slovenia, and Spain had spent a lower percentage of their GDP on defense. So that would be lower than 1.37%, which is where we are projected to have been at in 2024. So overall, we is where we are projected to have been at in 2024.

So overall, we were really low down there. And that's when compared to other members of NATO? Yes. OK, so we're seeing this massive spending commitment in large part because of the Trump administration's belief that Canada has been too reliant on the American military for protection. But how true is that? It's true that our industry relies heavily on the US's. The reality is that Canada is heavily intertwined with the US and of the 600 companies that make up our defense industrial base, roughly 40% of them are Canadian subsidiaries of US headquartered companies such as Lockheed Martin or General Dynamics.

And as we've seen with so many of our industries by way of tariffs lately, even some of the companies that may be headquartered in Canada, you know, their supply chains might be heavily intertwined with the US as well. And what about this sense of protection? Did this partnership unintentionally make our own military weaker? Yeah, I think the close relationship with the US has benefited us, but it has made us weaker when it comes to how we've set up our own security strategies and spending. For example, my colleague Nick posed the question of, you know, how will we patrol our north

when we've been so dependent in the past on US assets in Alaska? Or more broadly, how will we recalibrate the institutional relationships our military has with the US armed forces and their suppliers when we've been so dependent on that in the past? And, you know, we've known that the US could step in and protect us, and that's kind of been a sentiment that we've lived with, but there's fears cropping up now that we may not be strong enough to stand on our own if we ever needed to. We'll be right back.

Now that we've got a sense of why we're seeing this massive spending commitment, let's talk about the Canadian defense industry that's set to compete for it. Pippa, could you explain what kind of companies make up this sector and just how big is it? So like I mentioned earlier, there's about 600 companies who make up Canada's defense industrial base. This includes a large swath of manufacturing. There's icebreakers, aircraft. We also make a lot of simulation technology here, and we have a lot of companies who do military training, as well as satellite-based surveillance systems. So that's kind of like what exists.

And then we also have this more emerging industry where we're seeing a lot of technology companies that are working in fields such as AI or drone technology and that sort of thing. So there is a sense that some of this spending will go towards dual use products, which are products that are made for both commercial and defense applications. So for example, think of a drone,

that could be used for surveillance, deliveries, but also increasingly as a tool in warfare. How have these companies responded to Carney's defense pledge? Yeah, so in terms of kind of some of the major players, for example, CAE Inc. or Bombardier Inc. To them, the new focus on military spending could translate into major new lines of business

or lucrative government contracts. And then in terms of sort of that more emerging sector, we're really seeing like a transformation there in terms of this sector, this defense sector being something that in the past they may have avoided or been actively discouraged from entering because of the difficulties in finding investment within it. And it's now becoming almost like I think the hottest ticket in town is how we phrase it in the piece.

Okay, so we could see Canadian manufacturers especially benefit in the longer term from these spending increases. Pipa, do we have a sense of what this government's focus on defense does for Canadian business more broadly? Yeah, so it's definitely changing kind of the interest in the investment sector within Canada, which is really interesting. Traditionally, this has been a sector that we haven't seen a lot of excitement around in Canada when it comes to investors in the investing space. But I spoke to, for example, the Business Development Bank of Canada, which is a crown corporation. And they have kind of long operated under the pretense that defense wasn't a priority

in Canada, much like the rest of the federal government has. But now their CEO told me that she's planning to actively seek out new investments in dual use technologies, defense-related technologies, and even bring on new staff who have insight into what the sector needs and what is worth investing in. It's also a moment that is changing things for private investors in Canada. For example, Mark Maybank, he's the co-founder and managing partner at Mavericks Private Equity. He was at that Toronto Tech Week event that I spoke about earlier. And he said that some of the contracts that he has with pension funds that give him the money he then invests don't allow him to invest in purely defense companies.

However, emerging dual use technology can provide him almost like a legal route to invest in the space and support the defense space while still remaining compliant with his investment mandate. However, it is worth noting that involvement by Canada's big five banks, so that's BMO, RBC, CIBC, TD and Scotiabank, still remains fairly limited and when I reached out to all five of them for comment they either didn't give back to me or just declined a comment. It's interesting that some investors are becoming more interested in this.

Over the last few years, we've seen a big focus on ethical and sustainable investing. And I imagine that impacted investment in defense companies. Is there a sense that Carney's spending announcement here could reverse that trend? I think it's definitely a trend worth following. The focus is majorly shifting. And yeah, the amount of talk that we've had

about things like ESG or climate is going down dramatically compared to the amount of talk that we're seeing about defense. Okay, so people think there's a lot of money to be made here. Do we know if this will result in more jobs? I think we're still in the wait and see phase for this. I don't have a definitive answer yet. However, in the past, we've seen defense spending has been good for our manufacturing sector.

For example, in 1987, when Canada was last allocating 2% of its GDP to defense spending. We had a roughly 2.2% share of world manufacturing, which is nearly double where we are today, according to an analysis by the National Bank of Canada. At the time back then, we ranked ninth overall in the world for manufacturing output. And in 2023, we had fallen to 18th.

So this could be an opportunity for companies to make more money, but we are kind of still waiting to see how that will translate into jobs. Right, so a lot of opportunity here. But Pippa, we're talking about a massive commitment, not policy. Do we know how this big pledge will become a real plan in terms of how we're going to pay for this?

Yeah, so that plan will likely come in the form of the federal government's defense industrial strategy, which has been talked about and promised, but we're yet to see a clear document on. And when I asked the government for a timeline on that, they're yet to give one. In terms of how we're paying for it, some of the theories that have been thrown around so far

are that it could result in bigger deficits, higher taxes, and major cuts to spending in other areas. For example, at the beginning of July, we saw Carney ask ministers to find ways to reduce program spending by 7.5% in the fiscal year that begins April 1st, 2026, and then searching for even more savings in the years to come after that. Do we know more broadly what the government's vision for the military is? Is this investment just to double

everything? What's the broader strategy? Of the people that I spoke to, there's kind of a sense that some of it will go to investing in companies and capacity that already exists within Canada. So some of the things that we mentioned earlier, and then some of it will hopefully go to more technologies and companies that align more with the modern warfare that we are currently seeing unfold in other parts of the world.

Some examples we're throwing around, we've talked about the modernization of the North American Aerospace Defense Command, otherwise known as NORAD, to address evolving threats and maintain our effectiveness in defending North America. So the updates that have been promised there, that could be something that we see potentially sped up because of this spending. And then another kind of prevailing priority among the people that I spoke to was the Arctic.

So it was highlighted by a lot of people as a potential focus for the government spending, specifically because of the need to surveil and kind of arm our border up there. In 2022, an auditor general's report found that the Canadian Coast Guard and Transport Canada were at risk of losing their presence in Arctic waters because of aging icebreakers, old patrol aircraft, and satellites reaching the end of their lives. Meanwhile, the number of voyages in our Arctic waters have more than tripled from 1990 to 2019. So there's a lot more activity there and yet our infrastructure there is increasingly out of date. Do we know how Canadians feel about this potential spending increase? Yeah, so when you look at the support coming from Canadians, it's important to remember that Carney campaigned on 2%, not 5%.

So in reporting this piece, we found a poll that was done by the Angus Reed Institute in June that found almost half of Canadians considered the 5% target to be too high and compromising for other priorities. So potentially there being a fear that other things that they feel are a priority in Canada, you know, perhaps housing, for example, might get shafted by an increase in defense spending. However, the poll also found a rare instance of alignment between liberal and conservative voters in their support for increased defense spending.

It's just that target of 5% that might have people feeling a little weary. So that's right, Carney campaigned on 2% and it wasn't until June after the campaign that Trump asked that that GDP spending goal was raised to 5%. But I wonder if there's almost a sense that it doesn't matter if a lot of Canadians don't support this, that it's being viewed as a necessary sacrifice or even a duty. What do you think about that? Yeah, I think given the moment that we're in with global instability and then an unpredictable ally, there is an increasing sense that defense should be viewed as a necessity and a depoliticized

one as well. Just lastly here, Pippa, you know, we've been known as this peacekeeping nation for a long time. We're not actively fighting anywhere and we haven't prioritized strengthening our military in decades. But now we may be spending as if we're going to war. Is there a sense that an increased focus on defense could change our reputation on the world stage? I think a lot of people in the sector are kind of hoping that's the case. There

has been almost a sense of embarrassment for some time of people in the sector are kind of hoping that's the case. There has been almost a sense of embarrassment for some time of being in the defense sector in Canada just because of how we have kind of pushed it to the side for so long. And it's also worth noting that just because we're investing in defense and just because we're building up our capacity in this area doesn't mean that we are at war or that we have to necessarily put aside our reputation as a peacekeeping nation. For example, in Sweden, they have a company called Saab who Bombardier even recently partnered with

for a contract from France. They're a multi-billion dollar defense company that were founded in 1937 to provide military aircraft for Sweden and they now have more than 24,000 employees globally. And between 2014 and 2024, we saw Sweden climb from spending just over 1% of its GDP on defense to 2.14%. And I think, you know, it's fair to say Sweden is a relatively thought of as a relatively peaceful nation. So I think there's fair to say Sweden is a relatively, thought of as a relatively peaceful nation. So I think there's some hope that this spending

could not only benefit our economy and make us stronger in that sense, but also kind of bring us up to a similar level that a lot of our allies are already at when it comes to defense spending. And also potentially make a big difference in our relationships with them, especially as we work to expand trade.

Pippa, thank you so much for joining us today. Thanks for having me. That was Pippa Norman, the Globe's Innovation Reporter. That's it for today. I'm Irene Ghalia. Kevin Sexton mixed this episode. Our producers are Madeline White, Michal Stein, and Ali Graham. David Crosby edits the show.

Adrian Chung is our senior producer, and Angela Pacenza is our executive editor. Thank you for listening.