Commodity markets might suddenly allow Canada to afford both guns and butter

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The irony is tragic, but the war that has choked off Russian and Ukrainian exports could provide Canada with revenues to upgrade its defences, if the Liberal government has the will.

Russia’s wanton invasion of Ukraine revealed how dangerously our military has been run down. Defence Minister Anita Anand made the humiliating admission Wednesday that Canada exhausted its surplus armament capacity when it sent a few antiquated anti-tank missiles and sundry additional supplies to Ukraine.

“We need to make sure we do retain capacity here for the Canadian Armed Forces should the need arise,” she told CBC.

Up until now, an emaciated military has been just fine with Justin Trudeau, who prefers to be remembered as the prime minister who gave Canada a national child-care system, or who finally took the threat of global warming seriously, or who invested in mental-health services.

All worthy, but in the meantime this country has become more irrelevant on the world stage than at any time since the Statute of Westminster gave us control over foreign policy in 1931.

Foreign Minister Mélanie Joly pronounced something close to an epitaph for Canada’s foreign and defence policy this week when she told CTV, “We all know that Canada is not a nuclear power, it is not a military power, we’re a middle-sized power, and what we’re good at is convening, and making sure that diplomacy is happening, and meanwhile convincing other countries to do more.”

Canada’s role in the world is to persuade other countries to do what Canada cannot.

But Ms. Anand said she would be going to cabinet with proposals to increase Canada’s defence spending to 2 per cent of GDP – an annual increase of about $9-billion – or above, though the final amount could be less.

The government has already committed to a child-care program that will cost the federal government more than $8-billion a year. The pandemic revealed an urgent need for increased investments in long-term care. Something must be done about skyrocketing housing costs. And the deficit remains at an unsustainable level.

How will the government be able to square so many circles? One answer might lie in raising taxes. In its shadow budget, the C.D Howe Institute, a think tank, called for a two-percentage-point increase in the GST.

“These commitments do need to be paid for,” William Robson, C.D. Howe’s president, told me, though he would like to see any sales tax increase phased in slowly, to limit its inflationary impact.

But tax increases may not, in the end, be necessary. Commodity prices, including oil and gas, were rising even before Russia invaded Ukraine. The war and sanctions on Russia have sent them even higher. Russia and Ukraine are major exporters of wheat. Russia is a major exporter of wood and minerals. With war limiting both countries’ ability to export commodities that Canada also exports, this country finds itself in an enviable trading position, and Ottawa with unanticipated tax revenues.

“The macroeconomic situation is very weird, especially for a commodity exporter like Canada,” says Kevin Milligan, an economics professor at University of British Columbia. He says Ottawa can afford both guns (defence spending) and butter (the new child-care program) while also lowering the deficit and without having to raise taxes.

Aaron Wudrick agrees. But the domestic policy director at the Macdonald-Laurier Institute, a think tank, warns that the Liberals must exercise discipline. “They need to constrain government spending in other areas, to afford both child care and defence,” he says.

One way governments defer defence spending is by booking the cost of a tank that is ordered only after it’s delivered many years later.

But that option might not be available. Canadian troops in Latvia lack air cover, because our ancient fighter aircraft would not survive in battle. Replacement combat vessels are long overdue. NORAD urgently needs to upgrade its surveillance capabilities. We may need to spend a lot, quickly, to meet new and urgent commitments in both Europe and North America.

The time has come to do a whole lot more than convene. The April budget will show whether this Liberal government is up to the job.

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