Country Survey: Canadian Military Expenditure and Defence Policy

ABSTRACT

This paper provides an overview of the Canadian defence sector following the Cold War. A review of Canadian defence policy in this period indicates that, though the mission of the Canadian military did not change, fiscal realities forced severe restrictions on the size and capabilities of the organization. Comparisons between Canada and other G7 NATO nations indicate that throughout this period, Canada has consistently devoted fewer resources to the military than its allies. A review of Canada’s defence industrial base and defence policy indicates that this limited funding has led to a small and uncompetitive defence sector in the Canadian economy. Lastly, a regression analysis of Canada’s defence spending is undertaken which reveals that domestic economic variables are the primary determinant of Canadian defence spending during this period.

KEYWORDS:

• Military expenditure
• defence spending
• canadian defence
• nato

JELCodes:

• H56
• O51
• H41

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Recent country surveys in this series include De Rezende and Blackwell (2020), Johnson, Hove, and Lillekvelland (2017), Barros (2016), Caruso and Francesco (2012), Lin, Wu, and Chou (2012), and Hartley and MacDonald (2010). Readers interested in earlier analysis of Canadian defence policy are encouraged to read Stone and Solomon (2005).

2. For more on the Wales Summit Declaration please see: https://www.nato.int/cps/en/natohq/official_texts_112964.htm?mode=pressrelease (Accessed 9 July 2021).

3. While our work relies on a time series approach, there is also a large literature on determining military spending across countries using panel techniques. For interested readers, recent papers include Skogstad (2016), George and Sandler (2018), Christie (2019), and Odehnal and Neubauer (2020). Also, while our focus is on determining military spending, we note there is also a large related literature on the role military spending plays in an economy. For interested readers, recent papers include Compton and Paterson (2016) and D’Agostino, Dunne, and Pieroni (2019).

4. All variables in the analysis are expressed in real 2018 USD.

5. For further detail on the data sources please see Table A1 in the appendix.  The data is available by contacting either author.

6. Note that the relevance of other variables, such as trade openness and a dummy variable for the 2008 recession, were explored but were found to be neither economically or statistically significant.

7. Please see Table A2 in the appendix which provides, for each specification, the error correction model of the short-run estimates as well as F-test which tests the null of no long-run relationship between the levels variables. We note that the F-test results continually show rejection of the null hypothesis suggesting that there is a levels relationship among our variables. This is further supported by the error correction mechanism (ECM) at the top of each table. The ECM is consistently negative and statistically significant. This significance adds additional support to the validity of a long run relationship, while the negative coefficient details the speed of adjustment towards the long-run equilibrium in the event of a shock (note that an ECM of −0.5 would indicate the return to a long-run equilibrium by 50% over the course of a year following a shock). Another aspect of this table worth noting is the short-run reaction to European defence spending, which suggests Canada increases their spending in the short run when European spending increases. This is rather surprising in light of our other results in Tables 6 and 7.

8. For an excellent overview of Canada’s defence industry, see Solomon and Penney (2019)