By Paul Vieira

OTTAWA--A report from Canada's budget watchdog says defense spending would have to double from current levels to reach 2% of the economy by 2032 - a pledge Prime Minister Justin Trudeau made this summer under pressure from U.S. lawmakers.

This is likely to add to several fiscal headwinds that Canada faces, with some economists warning deficits are going to come in much higher than Liberal government projections.

The Office of the Parliamentary Budget Officer said Wednesday that annual defense spending in Canada - presently totaling about 41 billion Canadian dollars, or the equivalent of $29 billion - would need to double by 2033. For this to happen, there would need to be a "rapid escalation" in defense outlays after 2030, based on Canada's projected budget plans.

Members of the North Atlantic Treaty Organization have agreed to make annual defense expenditures that are equivalent to 2% of gross domestic product. Canada is one of a handful of countries that are not at that level, and Trudeau said the country would reach 2% by 2032 following pressure from senior U.S. lawmakers.

According to NATO figures, Canadian defense spending is expected to reach 1.37% of GDP this year, or the lowest among Group of Seven economies. Over two-thirds of alliance members spend 2% of GDP on defense.

In a report this week, Desjardins Securities economist Randall Bartlett said Canada's NATO pledge represents one of a number of factors that threaten to weigh on the country's public finances. "From increased military spending commitments to slower planned population growth to a potential second Trump presidency, the risks to the budget balance are tilted to the downside," Bartlett said.

Canada's Finance Minister Chrystia Freeland has pledged to limit the size of the annual budget deficit to C$40 billion, but both Desjardins and the parliamentary budget watchdog warn deficits are likely to exceed that threshold. Preliminary data for the 2023-24 fiscal year indicate the budget deficit was over C$50 billion.

Freeland last week skirted questions about the risk of higher-than-anticipated deficits, adding that a previous report from Canada's budget watchdog indicated that the country's public finances are on a sustainable path.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

October 30, 2024 10:40 ET (14:40 GMT)

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