Backgrounder: Stable, Predictable, and Realistic Funding

The business of developing policy is one thing; the business of funding it so that it delivers results is another. That is why the investments in Canada’s Defence Policy – Strong, Secure, Engaged – are so significant.

Under this policy, annual defence spending will increase from $18.9 billion in 2016/17 to $32.7 billion in 2026/27 on a cash basis ($17.1 billion in 2016/17 to $24.6 billion in 2026/27 on an accrual basis). This policy includes new defence funding of $62.3 billion on a cash basis over 20 years from today’s budget ($48.9 billion on an accrual basis). Of this, $47.2 billion is capital (critical new projects) and $15.1 billion is for operating expenses. Total funding available to Defence over the next 20 years will be $553 billion on a cash basis ($497 billion on an accrual basis).

These investments reflect Canada’s most rigorously costed defence policy in history. It is also fully funded.

This stable, realistic, and predictable funding will provide the Canadian Armed Forces (CAF) the means to be operationally effective in its service to Canada, Canadians, and around the world. It will also ensure substantially improved care of its personnel and their families.

Rigorous Costing and Third Party Review

The Department of National Defence (DND) worked with global defence costing experts from Deloitte, who contributed expertise gained from Defence Reviews in allied nations. DND also partnered with Finance Canada and the Treasury Board Secretariat throughout the costing process to ensure central agency oversight.

All costing methodologies to support the vision of Canada’s Defence Policy also underwent a detailed third party review conducted by five external accounting firms: Ernst & Young, KPMG, FMC, Samson and Associates, and Raymond Chabot Grant Thornton (RCGT). This review confirmed the validity of the policy’s costing methodology and the consistency of its application.

A life-cycle approach was used for both current and future major equipment requirements to take into account the full costs of use over the expected life of the equipment. This includes supporting infrastructure, training, maintenance, and operating costs.

Defence Funding ($millions)*

Ensuring Transparency of the Defence Budget

To deliver on government’s commitment to transparency, results, and accountability, the Government of Canada will publish the next Defence Investment Plan in 2018. This plan will be refreshed every three years to ensure the investment priorities of National Defence continue to be reflected.

The Defence Investment Plan:

• Provides important planning direction to guide the major investments that provide the CAF with the core capability to carry out its mandate;
• Identifies all major capital equipment, infrastructure spending and investments over $20 million for goods and services over a five-year period;
• Demonstrates prudent stewardship of public resources; and
• Increases public transparency and understanding of future changes to the budget; and how defence funding is managed and invested to deliver a modern, well-equipped, well-trained, and well-supported CAF.

Reporting of Defence Spending - NATO

This policy highlights significant additional investments by the Government of Canada. This is consistent with the NATO trend of reversing declining expenditures to meet the commitments agreed to in the Defence Investment Pledge in Wales. Defence spending is not the only or most effective measure of burden sharing. Within the Alliance, Canada continues to place a premium on tangible operational contributions, as well as on demonstrating a commitment and capacity to deploy and sustain personnel in support of the Alliance.

As part of the Defence Policy Review, a study was conducted to ensure that Canada’s methodologies to report to NATO on defence spending as a percentage of gross domestic product (GDP) were consistent with NATO criteria and those being used by our Allies. This study revealed that Canada has been under-reporting its defence spending. The key factor related to the under-reporting has been the exclusion of defence spending incurred by other government departments.

These consultations with NATO staff and our Allies have resulted in a clearer understanding of eligible expenses. Future reporting will now include defence spending from other government departments, such as: payments made directly to Veterans; peacekeeping and humanitarian operations; direct information technology support to defence; centrally funded defence personnel costs; and direct program support to defence. Canada will continue to consult with NATO officials to ensure that future reported costs are fully inclusive and reflective of defence spending in support of NATO.

Defence spending, reflected as a percentage of GDP^{Footnote 1}, is forecasted to increase from 1.19 percent in 2016/17 to 1.40 percent by 2024/25. This represents significant progress on the Defence Investment Pledge goal of working towards two percent GDP spending on defence. This will also position Canada to exceed NATO’s target for members to spend 20 percent of defence expenditure on major equipment. Under Strong, Secure, Engaged, it is forecasted to reach 32.2 percent in 2024-25.

Ensuring Effective Management of the Defence Budget

For the first time, all funding related to the acquisition of all capital assets will be on a purely accrual basis – which means the cost of the equipment is spread out over its expected life cycle. The operating and sustainment costs for equipment will also be earmarked during this process. This will better enable long-term planning and enhance the transparency of defence fiscal forecasts with Parliament.

In total, over the next 20 years, Canada’s Defence Policy will invest an additional $48.9 billion on an accrual basis; $33.8 billion for the acquisition of capital assets; and $15.1 billion for operating requirements. From 2017-18 to 2036-37, total defence spending on an accrual basis is estimated to be $497 billion (not including the costs of major military operations).

This policy also integrates additional funding flexibilities with respect to mission costs. While some operations can be managed from within the existing defence budget, for others National Defence will seek additional funding. This will help preserve the integrity of the defence budget, and ensure that other important priorities, such as investments in defence capabilities and caring for and supporting our people and their families, are not compromised by the costs of operations. In accordance with long-standing practice, the Government of Canada will take the funding decisions necessary for future military deployments as well as decisions related to continental defence and NORAD modernization.

Additional funding will also be provided for salary increases related to the renegotiation of collective agreements for civilian personnel and Treasury Board approved salary increases for military personnel.