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Canada is mulling a boost to defence spending as Russia’s invasion of Ukraine underscores the need for the NATO alliance to bolster its military capabilities.

“We have a budget coming up and we are considering the investments that we need to make,” Prime Minister Justin Trudeau told reporters last week during his trip to Europe.

But a report last week from the Parliamentary Budget Officer highlights the difficulties that Canada is encountering in executing its existing spending plan, never mind any expanded version.

“It seems to be difficult to ramp up spending,” Parliamentary Budget Officer Yves Giroux said in an interview, adding that the government’s record of delays in spending defence dollars raises questions about the feasibility of a quick build-up in response to the Russia-Ukraine war.

In its report last week, the PBO says the government announced a defence policy in June, 2017, that would spend $553-billion (on a cash basis) over 20 years through to 2036-37. Nearly a third, or $164-billion, was to be spent on capital acquisitions. That category encompasses tanks, airplanes, ships – essentially, any hardware that has more than a short-term life.

However, the government continues to underspend that budget, and bump planned expenditures to later and later years in the 20-year plan, the PBO said.

Those delays in defence spending have been happening for some time. In October, 2020, the PBO published an analysis that indicated there was cumulative capital underspending, compared to the 2017 plan, of nearly $5-billion between fiscal 2017-18 and fiscal 2019-20. Plus, spending was pushed into the future. In addition, there was a $13-billion gap between the $164-billion allocated for capital projects and the $150-billion worth of specific projects that the department was able to provide to the PBO.

Seventeen months later, many of those same issues linger, according to last week’s report. The cumulative gap in capital spending, now stretching from 2017-18 to 2020-21, has doubled to $10-billion.

Consequently, there has been even more spending pushed into the later years of the 20-year plan. The PBO notes that the government’s initial plan forecast increases in capital spending through to fiscal 2023-24, and then plateauing until 2027-28. Now, however, spending increases rapidly after 2023-24 and does not peak until 2027-28.

The PBO points to that surge as a concern, writing that “the substantial acceleration in capital spending from 2023-24 to 2027-28 potentially raises questions regarding the ability of the government to manage increased procurement activity.”

The planned spending in fiscal 2027-28 is at least three times higher than any annual capital spending in the past two decades, the parliamentary watchdog says.

One area of concern is whether the domestic defence industry can cope with such a rapid rise in spending. Another factor, the PBO notes, is whether budgets pushed back to later years will need to be increased to offset general and defence-specific inflation.

But there is one positive note. The defence department has at least been able to provide a comprehensive list of 348 projects that account for nearly all of the budgeted $164-billion, with the former gap of $13-billion shrinking to just $1-billion.

Taxing questions

Responding to a recent Tax and Spend on the small number of Canadians choosing to defer Canada Pension Plan benefits, one online reader asked if the statistics included those receiving the CPP disability benefit.

Those statistics do not include those receiving the disability benefit. In fact, one cannot receive the CPP disability benefit and regular CPP benefits at the same time. But, one must also be under 65 to receive the CPP disability benefit. So, any decision to defer CPP benefits past the age of 65 does not affect those benefits one way or another. (When a recipient turns 65, the disability pension is automatically converted and added into monthly regular CPP payments.)

However, there is a second type of disability benefits, the postretirement disability benefit, that would be affected by a decision to defer. That benefit, which began in 2019, is payable only after 15 months of the regular CPP pension, or if someone has become disabled after starting to receive the retirement pension. That pension is also only payable to those under 65, so anyone receiving it would not be counted among those deciding to defer the start of CPP benefits past the age of 65. In any case, the benefit only began in 2019, so the age group analyzed in the article, born between 1945 and 1950, had already turned 65 by the time it was introduced, and so were not eligible.


Premium on growth: A new report from the C.D. Howe Institute recommends extending the freeze on Employment Insurance premiums for five more years, one of several pro-growth measures in a shadow budget from authors William Robson, Don Drummond and Alexandre Laurin. The federal government froze those premiums for two years at the start of the pandemic, but EI contributions are set to rise sharply over the next five years to make up for the resulting accumulated deficit. Rather than saddle employees and employers with higher costs, the authors argue, Ottawa should instead make contributions to offset any shortfall.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.

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