Centre for International and Defence Policy

Centre for International and Defence Policy
Centre for International and Defence Policy

Defence spending likely to face post-COVID cuts

The Liberals' defence policy, Strong, Secure and Engaged, could be in for post-pandemic trouble.

By Aidan Chamandy, The Hill Times
25 May 2020 

We’ve cut everything there is to cut. In terms of serious savings, there aren’t savings to be found in efficiency exercises.
Professor Christian Leuprecht

As the COVID-19 pandemic continues into its third month and with the federal government’s response growing alongside it, defence experts anticipate the Department of National Defence will face significant cuts in the near future as Ottawa eventually tries to deal with the fallout of huge increases in government spending and a dramatic drop in revenues.

That could spell trouble for the governing Liberals’ landmark defence policy, ‘Strong, Secure, and Engaged,’ released in 2017, which is predicated on defence spending increasing year-over-year for the foreseeable future.

‘The Department of Defence budget is particularly attractive now because its planned spending increases. Strong, Secure and Engaged was a long-term plan to fund the department,’ said Eugene Lang, Queen's University.

“The temptation will be for the government to not spend to the amounts that were initially promised in Strong, Secure and Engaged,” because of the dire fiscal scenario, said Andrew Leslie, a former longtime member of the Canadian Armed Forces and a former Liberal MP who now works as a consultant for Bluesky Strategy.

Strong, Secure and Engaged proposed raising defence spending from $17.1-billion in 2016-17 to $24.6-billion by 2026-27, on an accrual basis. On a cash basis, that translates to raising spending from $18.9-billion in 2016-17 to $32.7-billion by 2026-27. Accrual accounting spreads the cost of a given asset over its useful life, whereas cash accounting allocates the cost in the year the expenditure was made.

The Department of Defence budget is particularly attractive now because of its planned spending increases. Strong, Secure and Engaged was a long-term plan to fund the department,” said Eugene Lang, chief of staff to two defence ministers in the Chrétien and Martin governments and professor of public policy at Queen’s University.

It is more alluring for a government to reduce planned spending increases because they can claim the move wasn’t a cut, making it more politically palatable, Mr. Lang said

In addition to Strong, Secure and Engaged being an attractive target because much of the spending comes in the future, the overall size of the department’s budget makes it an unavoidable target in any kind of expenditure review, said Christian Leuprecht, professor at Queen’s University and Royal Military College and senior fellow with the Macdonald-Laurier Institute. The department accounted for just over $22-billion in spending last year, and historically accounts for around 20 per cent of federal discretionary spending.

Following the 1994 recession, the Chrétien government reduced defence spending leading to the “decade of darkness” in the Canadian Armed Forces. Bases were closed, troop size was reduced, and more. Defence spending was 1.8 per cent of GDP in 1993, and dropped to 1.2 per cent by 1997. In fiscal year 1998-99, the Chrétien government further reduced it by 25 per cent through budget control measures, according to J. Craig Stone and Binyam Solomon in Canadian Defence Policy in Theory and Practice.

Following the 2008 recession, defence spending also dropped. Between 2009 and 2013, defence spending was reduced from 1.4 per cent of GDP to just over 1 per cent, one of the lowest totals in Canadian history.

Between 2010 and 2015, the department went through three different rounds of efficiency exercises that “picked all the low hanging fruit,” said Dave Perry, vice-president of the Canadian Global Affairs Institute.

The Parliamentary Budget Office estimates the Canadian GDP dropping by 12 per cent in 2020 due to the pandemic and oil price shocks, by far the largest drop ever recorded. The budget deficit could increase to more than $250-billion in 2020-21, accounting for 12.7 per cent of GDP, also the highest ever recorded. The federal debt-to-GDP ratio, which the Liberal government touts as a crucial fiscal marker, would rise to 48.4 per cent, lower than the high-point of 66.6 per cent seen in 1996-96.

Historically, Canadian defence policies have “suffered the fate of fiscal consolidation following a recession,” Mr. Lang said, and given the current fiscal situation, he said he expects a similar process to happen post-COVID-19.

Some national governments around the world have already started cutting defence spending and are reallocating the money to COVID-19 response efforts.

On April 16, South Korea introduced a second COVID-19-response budget that reduced defence spending by just under two per cent (approximately USD$733-million) from the first response budget, according to reports. Thailand also cut defence spending by nearly USD$555-million, and Indonesia by USD$588-million.

Though the pandemic continues to create novel problems for every part of government, Canada’s Defence Department was facing spending challenges related to its Strong, Secure and Engaged policy goals prior to COVID-19.

According to Mr. Perry’s annual review of the policy, the department has failed to meet some of the spending targets.

In the fiscal year 2017-18, total defence spending actually exceeded planned spending by about $2-billion, but this was due to a nearly $2-billion, one-time pension adjustment. Since then, overall defence spending has been in line with the projections in Strong, Secure and Engaged, but below the top-line numbers.

Capital spending and the allocation of capital funding have both lagged behind what was promised in the policy.

In 2017-18, DND fell $2.5-billion short on actual capital spending compared to what was projected. In 2018-19, DND’s allocation fell $2.3-billion short of projections.

Despite the historic shortcomings, Mr. Perry’s analysis notes that capital spending is increasing.

When a department doesn’t meet its spending targets, Mr. Lang said, that sends a signal to others in government and in Parliament that the money isn’t needed.

“If they can’t meet the spending profile in Strong, Secure and Engaged, why should we give them the money? That’s the message that gets sent by underspending,” he said.

If the fiscal pressures are such that a reduction in defence spending is necessary, deciding where to cut will be difficult given the several rounds of cuts over the past three decades.

The three efficiency exercises between 2010 and 2015 “picked all the low hanging fruit, and all the rest of the fruit. Everything you might consider to be low hanging fruit would all be stuff that this government created, which would make a discussion on getting rid of it a lot more difficult,” Mr. Perry said. “It’s a lot easier when its something the last government did.” 

Prof. Leuprecht said he sees this challenge as a good opportunity to rethink some first principles of Canadian defence policy.

“We’ve cut everything there is to cut. In terms of serious savings, there aren’t savings to be found in efficiency exercises,” he said. “An efficiency exercise this time around is going to have to be an honest conversation about what are we going to ask the military to stop doing, what do we want them to do, and what’s going to give.”

He said the military, government, and the public writ large will have very different ideas on how to best address the question, and reconciling those diverging views is going to be at the heart of the funding issue going forward.