Good morning. Canadian taxpayers are about to start spending a whole lot more on this country’s military, after Prime Minister Mark Carney committed to the biggest boost to defence spending since the Second World War. Today, we’ll consider where these many billions of dollars might come from and where they might land. But first:
In the news
Wildfires: An aggressive start to the wildfire season this year has jeopardized Manitoba’s economy more than any other province in the country.
Tech: BlackBerry’s stock soared Wednesday after the company reported its first net profit in more than three years.
Retail: Ruby Liu lacks the experience to run department stores in former Hudson’s Bay spaces, Cadillac Fairview chief executive officer says.
On our radar
- Friday: All eyes will be on Canada’s GDP numbers for April to see how much the trade war weighed on the domestic economy
- Also Friday: Consumer data will be closely watched for signs of weakness in how Americans are feeling and spending
- Notable earnings include Corus Entertainment Inc. today
Prime Minister Mark Carney with NATO Secretary General Mark Rutte, right and Prime Minister of the Netherlands Dick Schoof at the NATO summit Wednesday.Geert Vanden Wijngaert/The Associated Press
In focus
Defending Canadian interests
The revival of the Canadian military has taken on an urgency that Canadians haven’t seen in the better part of a century. It was just a couple of weeks ago that Carney said Canada would meet its NATO spending obligations of 2 per cent of GDP this fiscal year. That alone raised questions about where the extra $9.3-billion was going to come from.
Then the goalposts shifted. Meeting NATO’s new 5-per-cent target for member countries will require an additional $50-billion in defence-related spending in Canada every year. But it’s unclear whether the support and the resources are there to facilitate such a colossal investment in the Canadian Armed Forces.
Do Canadians want this?
Maybe not. David Perry, president of the Canadian Global Affairs Institute, told The Globe’s Stephen Chase that public support is not a given for this magnitude of defence spending. The last time the country funded the military this aggressively was from 1939 to 1942, when Canada mobilized for war in Europe and the Pacific.
But the taxpayer could be brought on board, he added. Geopolitically, modernizing the country’s neglected military is needed to meet the threat an expansionist Russia poses. The commitment also serves a second purpose: appeasing Trump, who has long seen Canada as a laggard on defence, which is one of the many grievances fueling his economic hostility toward this country.
Carney is walking a policy tightrope. One on hand, he has a mandate to defend Canadian sovereignty against Trump’s attacks and reorient the country away from its dependency on the U.S. On the other, defending Canada’s economic interests requires upholding the relationship with the U.S.
That means, among other things, satisfying “Trump’s obsession with arbitrary NATO targets,” Globe columnist Doug Saunders writes.
“Mr. Carney is discussing the notion of Canadian participation in Mr. Trump’s ‘golden dome’ missile-defence megaproject just as the renegotiation of our crucial free-trade agreement is beginning.”
Can we afford this?
It’s a lot of money. The new targets would nearly double the existing military budget by 2035. Canada’s ability to manage the cost is a legitimate question.
“Fiscal pressures are mounting quickly,” National Bank of Canada economist Taylor Schleich wrote in a note.
“And while we argued earlier that the marginal spending required to hit 2 per cent wasn’t that significant, this new target certainly passes the materiality test.”
A portion of the NATO target is 1.5 per cent of GDP for defence-related infrastructure spending, which Canada may be able to satisfy with projects already underway.
“But that still leaves a big hole to fill,” Mr. Schleich said, which will likely require new debt issuance. That could translate to higher bond yields, which would raise the government’s cost of borrowing, as well as potential pressure on Canada’s creditworthiness.
Where to spend this money?
Carney has spoken recently of deepening defence relationships with European allies.
“We should no longer send three-quarters of our defence capital spending to America,” he said a couple of weeks ago.
The smarter play may be to leverage this new emphasis on Canadian defence in trade discussions with the U.S., C.D. Howe’s James Pierlot writes in The Globe.
“At a time when U.S. tariffs are crippling Canadian exporters and small businesses, a defence pivot of this magnitude should be focused on the United States and also be used as leverage,” he said.
“If we’re going to invest billions more in continental security, it’s time we got something back: stable, tariff-free trade with our largest ally.”
Will there be Canadian beneficiaries?
It’s hard to get away from the scale and sophistication of America’s defence contractors. And Canada hasn’t exactly cultivated a thriving domestic defence sector.
The Canadian tech industry is beginning to gear up for an era of much higher defence spending, writes innovation reporter Pippa Norman.
“But the industry is, in many ways, starting from scratch and needs to quickly ramp up expertise among businesses, investors and government owing to the country’s decades of underinvestment in defence.”
Charted
Most Canadians choose to start receiving their Canadian Pension Plan early, despite the math showing that this is probably the wrong move.
It only pays off to start payments at age 60 for those who die by around 80 years old. Those who live longer would receive higher total lifetime benefits if they wait until age 70 before taking CPP.
When you factor in life expectancy for Canadian women, there is only about 15 per cent chance they will be better off starting early.
Former chief actuary of Morneau Shepell, Fred Vettese, who helps Globe readers visualize retirement, picked this chart as one his favourites.
Bookmarked
On our reading list
Personal finance: Eight lessons Rob Carrick has learned in 27 years of covering personal finance and investing for The Globe.
Public service: Michael Sabia faces an uphill climb in reforming Canada’s civil service.
Household debt: Young Canadians aged 30 and under are failing to make payments on their mortgages at a rate seven times higher than the rest of the population.
Morning update
Global stocks were mostly higher and the U.S. dollar sank as investors eyed the Middle East conflict, Trump’s tariff deadline and the U.S. President’s latest criticism of Federal Reserve Chair Powell.
Wall Street and TSX futures were up.
The pan-European STOXX 600 was up 0.23 per cent in midday trading. Britain’s FTSE 100 rose 0.37 per cent, Germany’s DAX rose 0.55 per cent and France’s CAC 40 gained 0.17 per cent.
In Asia, Japan’s Nikkei closed 1.65 per cent higher, while Hong Kong’s Hang Seng was down 0.61 per cent.
The Canadian dollar traded at 73.07 US cents.
