Michael Wernick: Canada Needs A Defence And Security Tax To Meet Its New Nato Commitments Head On

Over the past year, a chorus has risen calling for an increase in spending on defence . Canada has been pressed to show we are putting enough effort into protecting and policing our own land, sea and air borders while also contributing to the collective security of North America and the NATO alliance. The recent NATO summit took the pressure up several notches.

Regardless of any arbitrary arithmetical targets, the case for Canada spending more on defence and security and investing smartly and briskly to raise our capabilities is a strong one. Clearly the world is more dangerous and unlikely to become less so any time soon.

Canada will see increasing stresses on our security as the guardian of the longest coastline in the world, of our Arctic archipelago and the airspace vital to the next generation of North American missile defence. As regional conflicts flare around the globe, Canada will be asked to contribute in some manner to operations as we have so many times in the past. Our economy and society will need ever stronger cybersecurity defences. Enhanced intelligence gathering will be key to all of these efforts.

The numbers coming out of the NATO summit are daunting, and there are no easy options when it comes to finding the money. The choices are borrow, tax, or cut other areas of spending to make room. We will end up doing a bit of all three — the question is in what mix and how fast.

Borrowing the incremental dollars means shifting the burden to future taxpayers to pay for greater effort today. It runs against inter-generational fairness and the debt load would leave us more vulnerable to shocks. Cutting other areas to make room is never easy. Let’s not pretend that cuts are coming to old age pensions or transfers to the provinces, territories and Indigenous governments, or that we will stop paying interest on government debt. Now we won’t be cutting defence, border services or security agencies. The “cuttable” part of federal spending is far less than the total and is nowhere near sufficient to generate the numbers needed to meet the new defence targets, even if we take a slow walk to the 2035 goalpost.

If there ever was a time when the tired old phrase “think outside the box” applies, this would be it. The box we are caught in is a revenue constraint quite purposefully created two decades ago by Jim Flaherty when he cut the GST by two points. Ever since, Canadian politicians have been painting themselves into a corner, pandering to short term electoral politics, bidding for tax holidays and cuts and treating the GST rate as untouchable.

The “truth to power” and “truth to voters” reality that makes many people uncomfortable and will make politicians squirm is that the national government simply needs more revenue to do all the things Canadians will expect in the remainder of the 2020s and beyond.

There is a way out of the box, out of the corner. Parliament could come together in the national interest and create a new Defence and Security Tax (DST), collected on the same base as the GST/HST, using the same exemptions and rebates for low-income households. It could be set up to start at a time of Parliament’s choosing, say, January 2027, be ramped up in steps and sunset after ten years. Taxing consumption on a broad base, not income, is the policy path most consistent with our aspirations for greater economic  productivity and growth.

The DST rate could be set to cover a substantial portion of the federal role in keeping us safe. Two points of the GST base for ten years is a good starting point for discussion. A rough model for this approach would be the “solidarity tax” created in Germany to finance reunification.

The incremental revenue generated by a 10-year Defence and Security Tax could be tracked to the penny by Parliament and the Auditor General by flowing it into a separate earmarked account. I know that will appall the orthodox finance hands who read this, but this approach would increase transparency and should protect the DST against leakage into other program areas in future budgets. The legislation creating the DST could include an accounting firewall and task the government and the Parliamentary Budget Officer with providing annual implementation reporting of all intake and disbursements.

The DST account can be set up by law to only be drawn upon by a prescribed list of federal organizations directly involved in keeping Canada safe. The list should be strictly limited to National Defence, the Canadian Coast Guard, Public Safety, Canada Border Services Agency, RCMP, CSIS, Canadian Security Establishment and the review agencies associated with them. This cluster currently employs around 65,000 civilian public servants as well as the uniformed military and law enforcement personnel of the federal state.

A transparent and predictable funding envelope would allow us to start building and move on to more important policy debates about how to spend those funds wisely, how to sharpen the cutting edge of our military and the capabilities of our coast guard, border services and intelligence agencies, and how to procure at a much faster pace with better results.

Emerging from the Hague Summit, we don’t need another sterile and performative debate where people call for more spending on defence and security but won’t declare how to pay for it — or worse, practice fiscal NIMBYism (cut, but cut somewhere else). The arithmetic of finding $150 billion a year, rising over time, is unforgiving. We need our leaders to not just admire and quote Winston Churchill, but to emulate his realism about the need to invest and be ready for a more dangerous time ahead. To paraphrase the great man’s memoirs — the storm is gathering.

• Expect higher deficits to meet Canada's 5% NATO defence spending target
• Consumption-oriented taxes are a better option than those on labour or potentially robots

An earmarked DST would remind Canadians that their safety and security doesn’t come for free. We may like to sing that we stand on guard for Canada, but it takes collective effort and sacrifice. Lest we forget, past generations of Canadians made sacrifices for their safety and a safer world. Now it is our turn.

Michael Wernick is the Jarislowsky Chair in Public Sector Management at the University of Ottawa and former Clerk of the Privy Council.