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From swaggering to staggering – Canada’s decline into irrelevance

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From the MacDonald Laurier Institute

By Philip Cross

It’s remarkable how much our international reputation has faded over the past 10 years, both diplomatically and economically.

It is remarkable how much attitudes about Canada have shifted, both here and abroad, over the past 10 years. A decade ago, riding the wave of a booming economy, Canada was widely admired for a banking system that had got through the 2008-2009 global financial crisis without government bailouts. Today the country’s global stature is much diminished and Canadians are rapidly losing confidence in their economic prospects.

In the years leading up to 2016 Canadians grew accustomed to global accolades. In a 2003 cover story, The Economist touted the prospects for “cool Canada,” following up in 2006 that Canada’s relative economic performance made it a “superstar” as the “only country running both current-account and budget surpluses.” Steve Poloz, then chief economist at EDC, said in 2005 the stars were aligned for Canadian firms to achieve the “productivity miracle” already realized in the U.S. In 2012, the OECD secretariat forecast Canada’s economic growth would lead the G7 nations over the next 50 years. Our AAA credit rating, stable economy and resource riches prompted the IMF in 2012 to recommend central banks hold more currency reserves in Canadian dollars, leading to headlines about “loonie set to join global currency elite” as a safe haven in turbulent times.

A Maclean’s article reporting 2011 poll results proclaimed Canada was “on top of the world” and “Canadians have never felt so upbeat about the future.” A year later, Joe O’Connor could claim in this newspaper that “Canada’s got swagger.” This confidence was reinforced when Britain hired Mark Carney in 2012 as the first foreign-born governor of the Bank of England, calling him the “best central banker of his generation.” On the global stage, in 2016 U.S. President Barack Obama told Parliament: “the world needs more Canada.”

A stable banking system was not Canada’s only perceived financial advantage. Some analysts predicted Toronto would become a major trading centre for the North American cap-and-trade carbon market. Moody’s Analytics projected Toronto’s financial services industry would employ more people than London’s by 2017. Tiff Macklem, then dean of the Rotman School, wrote an op-ed in 2016 touting Toronto’s “potential to become the leading global fintech hub.”

That was then. Today Canada’s reality is much different than people were expecting before 2015. Its finance sector is known for being “an ATM and safe deposit box for money laundering,” according to Jonathan Manthorpe in his 2019 book,  Claws of the Panda. In 2018, The Economist noted that Canada “has long had a reputation as a place to snow-wash money.” Regulation is split between federal and provincial governments and there are almost no restrictions on lawyers involved in laundering.

Instead of buoyant economic growth, the OECD last year downgraded Canada’s prospects to 2060 to dead last out of 38 nations. In a 2019 feature, The Economist noted that the top Canadian firm on Fortune’s list of the world’s largest companies ranked 241st, concluding that our “economy and business culture will have to become more American.”

Nothing has damaged Canada’s economy and global stature more than the obstacles governments have deployed to hamper our energy industry. In 2011, the late Jim Prentice, then vice-chairman of CIBC, reviewed the slew of Canadian energy projects then underway, from hydro in Labrador to Alberta’s oil sands, and concluded “no one else is bringing on energy projects on the pace and scale of Canada.” Today, by contrast, British Columbia and Quebec are struggling to meet electricity demand, while the oil sands have slashed investment.

The harm from discouraging oil and gas development was fully revealed after Russia’s 2022 invasion of Ukraine. Canada was unable to answer Europe’s desperate need for oil and gas. When German Chancellor Scholz visited Canada to plead for more natural gas, our prime minister claimed there was “no business case” to support LNG exports to Europe. Meanwhile, since March 2022, American firms have signed now fewer than 57 supply agreements with Europe for 73 million metric tons of LNG annually, according to a recent report in the Wall Street Journal.

A recent Nanos poll found even fewer Canadians (just 13 per cent) thought our global reputation had improved than were satisfied with the state of our economy (23 per cent). The Wall Street Journal said last year that Canada’s paltry defence spending should disqualify us from G7 membership, while Spain is openly lobbying to take our place. We have become irrelevant to the geopolitics of our natural allies, whether the problem at hand is the growing rivalry between the U.S. on the one hand and Russia and China on the other or the EU’s fixation on rectifying its energy and defence deficits.

More broadly, Canada has failed in its traditional role of explaining the U.S. to the rest of the world. Though it’s strange to recall, immediately after Donald Trump’s election in 2016, the hope was Trudeau would be the “Trump Whisperer,” establishing Canada as an “indispensable nation,” to quote Maclean’s Scott Gilmore. Instead, we have reverted to our traditional sense of moral superiority over Americans and now parrot the global chorus condemning the direction of U.S. politics. We have a plan for dealing with Trump, the prime minister assures us. Good luck to us with that.

Philip Cross is a senior fellow at the Macdonald-Laurier Institute.

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Canada could cut deal with U.S.—increase defence spending, remove tariffs

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From the Fraser Institute

By John Ibbitson

Because we live in dangerous times, and because an honest country keeps its word, Canada should meet its NATO commitment to spend at least 2 per cent of GDP on defence. But there’s another reason to live up to that promise—it’s good for trade.

Countries that are able to defend themselves earn the respect of their allies. That respect can provide tangible benefits. Consider Cyprus and the Auto Pact.

In the winter of 1964, in the depths of the Cold War, violence between Greek and Turkish Cypriots threatened to escalate into war between Turkey and Greece. President Lyndon Johnson, anxious to prevent war between two NATO members, was hugely grateful when Prime Minister Lester Pearson agreed to dispatch a peacekeeping force to the island.

“You’ll never know what this may have prevented,” said Johnson. “Now what can I do for you?” As Pearson noted in his memoirs, “I had some credit in the bank.”

A year later, Canada and the United States signed the Auto Pact, which guaranteed minimum levels of production for the Canadian auto industry. “I believe that Johnson’s willingness to agree to the Auto Pact the next year, an agreement that hugely benefited Canada’s auto sector, may well have been Pearson’s reward for Cyprus,” wrote historian J.L. Granatstein years later.

Canada’s relations with its NATO allies cooled in the years when Pierre Trudeau was prime minister. Trudeau considered pulling out of NATO entirely, but in the end contented himself with greatly reducing Canada’s troop presence in Europe. But Trudeau began to show new respect for NATO when he sought to diversify Canada’s trading relationships. “No tanks, no trade,” West German Chancellor Helmut Schmidt reportedly told him. Trudeau subsequently boosted defence spending and Canada acquired German Leopard tanks.

In the 1980s, as Brian Mulroney sought to improve relations with the U.S., his government maintained  defence spending at or near 2 per cent of GDP, even as the government reduced spending in other areas to bring down a chronic deficit. On Mulroney’s watch, Canada retained a robust commitment to NATO and NORAD. In February 1990, former Cold War antagonists agreed to a process for German reunification during the Open Skies conference in Ottawa; six months later, Canada joined a U.S.-led coalition that ejected Iraqi forces from Kuwait.

And in the midst of this stalwart support, Canada and the U.S. negotiated their historic free trade agreement.

Then came the so-called Decade of Darkness, as Jean Chretien’s government cut funding to the military to help balance the budget. In the 2000s, Stephen Harper ensured that the Canadian mission in Afghanistan was properly equipped, but his government further cut spending in the wake of the 2008-09 financial crisis. By the time Justin Trudeau came to power, defence spending was at 1 per cent of GDP.

While it appears Justin Trudeau’s government increased defence spending, part of that is the  accounting trick of putting veterans’ benefits in the budget. In fact, Canada remains virtually the sole outlier among NATO members in having no credible plan to get to 2 per cent any time soon.

Last spring, 23 U.S. senators (both Democrat and Republican) issued a letter taking Canada to task for failing to meet its defence commitments. And they spoke plainly. “We are concerned and profoundly disappointed that Canada’s most recent projection indicated that it will not reach its two percent commitment this decade.”

In that sense, Donald Trump was speaking for everyone in Washington when, as president-elect, he told reporters that “we basically protect Canada… we’re spending hundreds of billions a year to take care of Canada.”

That doesn’t in any way excuse the punitive tariffs the administration imposed on Canada and Mexico over the weekend. Those economic sanctions are capricious, vindictive and mutually damaging. Canada had no choice to but to respond in kind.

But it’s also true that other countries no longer take this country seriously. During the Biden administration, the U.S., the United Kingdom and Australia entered into the AUKUS security pact. Canada wasn’t invited. And QUAD security dialogue involving Australia, India, Japan and the U.S. is not QUINT, because we weren’t asked to join.

Canada will have a new federal government within months. Its highest priority must be to restore free trade with the U.S. One way to negotiate seriously with the Trump administration may be to offer a specific concrete program of investment in the NORAD partnership, in exchange for the removal of tariffs.

If the Americans agree, it wouldn’t be the first time that trade and defence were intertwined.

John Ibbitson

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State of federal finances make NATO spending target very challenging

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From the Fraser Institute

By Jake Fuss and Grady Munro

Defence Minister Bill Blair recently claimed the federal government could “absolutely” achieve the North Atlantic Treaty Organization (NATO) defence spending target of 2.0 per cent of gross domestic product (GDP—a measure of the size of the economy) by 2027. However, the dismal state of Canada’s finances makes this accelerated timeline very costly to Canadians.

First, some background. In 2014, Canada (along with the other NATO members) formally pledged to increase spending on defence up to a target of 2.0 per cent of GDP by 2024. At the time, Canada spent 1.01 per cent of GDP on defence. A decade has passed and Canada has failed to fulfill that pledge. Indeed, based on the current defence spending plan and the latest GDP projections, Canada’s defence spending is expected to reach just 1.34 per cent of GDP ($41.0 billion) in 2024/25.

Based on the latest spending estimates from NATO, Canada is one of only eight NATO members (out of 31 in total) to spend less than 2.0 per cent of GDP on defence. As the large majority of the alliance has now met the spending target, and President Donald Trump has called for the target to be raised even further to 5 per cent of GDP, Canada will have to dramatically increase defence spending (lest we be at complete odds with our allies).

However, meeting the NATO 2.0 per cent target by 2027/28 would require billions more in annual federal spending (see the following figure).Over the next three years, according to the Parliamentary Budget Officer (PBO), the federal government will increase defence spending from a projected $41.0 billion in 2024/25 to $53.5 billion in 2027/28—with the majority of this increase occurring in the first year. This means, based on the current plan, Canada’s defence spending would only reach 1.55 per cent of GDP by 2027/28.

To reach 2.0 per cent of GDP in 2027/28, the government would need to spend $68.8 billion on defence during that fiscal year. Assuming the initial jump remains the same, this implies the government would need to increase annual defence spending by $16.5 billion from 2025/26 to 2027/28—$15.3 billion more than currently planned.

The federal government plans to run four consecutive budget deficits from 2024/25 to 2027/28 that add up to $151.9 billion in expected borrowing. In other words, the government already plans to spend more than it collects in revenues. Assuming the government adopts the spending plan shown in the above figure, reaching the NATO target by 2027/28 would require an additional $22.7 billion in borrowing.

Increasing the amount borrowed will impose substantial costs on Canadians. In the near-term it results in higher debt interest payments. Government must pay interest on its debt—same as a family with a mortgage—and rising interest costs leave less money available for programs and services. For perspective, largely due to past borrowing under the Trudeau government, federal debt interest payments are expected to equal all Goods and Services Tax (GST) revenues (and then some) in 2024/25. Longer-term, an increase in borrowed money will also burden future generations of taxpayers who will likely face higher taxes to pay for today’s spending.

Clearly, borrowing money to fund higher defence spending will only worsen the state of federal finances, meaning Canada is in a lose-lose situation when it comes to meeting the NATO 2.0 per cent target—risk the consequences of further disappointing our allies or take on billions more in debt.

Instead, Ottawa should identify and cut wasteful spending and use those savings for national defence. Simply put, smaller and smarter government spending could help get Canada out of this lose-lose situation.

Jake Fuss

Director, Fiscal Studies, Fraser Institute

Grady Munro

Policy Analyst, Fraser Institute
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