The economic promise and danger – of higher defense expenditure

The decision by Prime Minister Mark Carney to increase defense expenditure in Canada has sparked discussions about the potential economic benefits and risks associated with such a move. While the government justifies the increase by citing increased geopolitical threats, economists believe that the expenditure could stimulate the economy in the short term and potentially contribute to long-term growth if productivity gains are realized.

However, there are concerns about the long-term implications of higher defense spending. Research indicates that the economic benefits are not guaranteed and depend on how and where the government allocates the funds. Borrowing to finance increased defense expenditure could strain public finances and potentially impact other areas of government spending.

Royal Bank of Canada Assistant Head Economist Cynthia Leach emphasizes the importance of considering the long-term implications of defense spending, particularly in terms of promoting economic growth through domestic industries and innovation. She highlights the need for Canadian content in the defense supply chain to maximize economic benefits.

Prime Minister Carney has committed to increasing defense expenditure to meet NATO’s new targets, which will require significant investment over the coming years. The economic context today is different from historical precedents, with higher national debt levels and tax rates posing challenges for financing increased defense spending.

An industrial strategy for defense is being developed to prioritize purchasing Canadian equipment and materials, with a focus on creating jobs and stimulating economic growth. The government must specify which defense services and equipment to develop domestically to maximize the economic impact of increased spending.

Investing in research and development (R&D) is seen as a key driver of productivity growth and economic benefits. By increasing government funding for Defense-related R&D, Canada can stimulate private sector innovation and commercialization efforts.

Infrastructure investments that support defense capabilities and other economic activities, such as providing access to remote areas for Arctic defense, have the potential for significant economic benefits. Building critical infrastructure for double use could enhance economic overflow effects and contribute to long-term economic growth.

While there are risks associated with increased defense spending, analysts are hopeful that Canada’s renewed commitment to strengthening its defense capabilities will have a positive economic impact. By strategically allocating funds to domestic industries, innovation, and infrastructure, the government can maximize the economic benefits of higher defense expenditure while minimizing potential risks.