Canada will need to spend $163.6 billion in cash on core defence by 2035 to meet NATO’s new 5% of GDP target, according to the Parliamentary Budget Office, underscoring how far Ottawa still is from turning its pledge into a funded plan.
Canada defence spending to reach $163.6B by 2035
The estimate matters because the alliance’s new benchmark is no longer a symbolic commitment: it implies a sustained jump in federal borrowing, procurement and infrastructure spending over the next decade, with the PBO warning the cash cost could translate into borrowing needs as much as 30% higher than the deficits recorded under Ottawa’s accrual-based accounting.
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The watchdog said Canada’s defence plans remain “in formation,” with key details still missing from Budget 2025 and the spring economic update, which offered no breakdown of projected military spending. Finance Minister François-Philippe Champagne has said more details are coming, but has given no timeline.
Under NATO’s target, 3.5% of GDP is meant for core military spending and 1.5% for related infrastructure and ancillary outlays. Canada only recently reached the alliance’s old 2% goal, first promised in 2014, and Prime Minister Mark Carney in May said the country would get to 4% by 2030-31, a path the PBO says would require $95.7 billion in spending by 2030.
The report lands as several NATO members struggle to reconcile higher defence outlays with tighter fiscal room. Italy has cut defence spending, the UK is weighing delays to its own increase, and officials in Europe have warned against unchecked borrowing even as Russia prepares to lift military spending further by 2027.
For investors, the biggest takeaway is that the spending gap points to a multi-year pipeline for defence contractors, infrastructure builders and suppliers tied to Arctic surveillance, submarines, vehicles and weapons replacement. Ottawa has already announced projects including the Canadian Patrol Submarine Project, Arctic over-the-horizon radar and armoured combat support vehicles, but the PBO said the costings remain incomplete and still do not get Canada to its NATO target.
The spending backdrop also helps explain the renewed interest in defence shares. U.S.-listed aerospace and defence names such as Lockheed Martin and the broader ITA and XAR ETFs have been trading with elevated volatility as markets price in a longer-cycle rearmament theme, even as some technical indicators show recent pullbacks from earlier highs.
The PBO said recent Defence Department spending is improving, noting the gap between planned and actual capital outlays has narrowed. Capital expenditures rose from $4.9 billion in 2022-23 to $8.8 billion in 2024-25, while lapses fell to $0.2 billion from about $1.0 billion, suggesting Ottawa is spending more of what it already budgets.
Still, the central issue is scale: meeting NATO’s 2035 target will require not just higher budgets, but a clearer financing plan, more transparent procurement and a sustained lift in Canada’s defence industrial base.
| Entity | Gains | Losses |
|---|---|---|
| Canadian defence contractors | ▲More procurement demand | ▼Budget uncertainty |
| NATO allies | ▲Higher burden-sharing credibility | ▼Fiscal flexibility |
| Ottawa | ▲Stronger security posture | ▼Higher borrowing needs |
| Taxpayers | ▲Improved defence readiness | ▼Larger long-term fiscal cost |
