3. Fixing Defence Funding

Stable, predictable, realistic funding

The vision and new initiatives set out in Strong, Secure, Engaged are backed by a long-term funding commitment and model that fully provide the resources for implementation.

To meet Canada’s defence needs at home and abroad, the Government will grow annual defence spending over the next 10 years from $17.1 billion in 2016-17 to $24.6 billion in 2026-27 on an accrual basis. This translates to a rise in annual defence spending on a cash basis from $18.9 billion in 2016-17 to $32.7 billion in 2026-27, an increase of over 70 percent. The total funding available to Defence over the next 20 years will be $497.0 billion on an accrual basis, or $553.0 billion on a cash basis (Table 1). Total forecasted defence spending as a percentage of gross domestic product is expected to reach 1.40 percent by 2024-25. This level of funding is affordable, achievable, and has been informed by a rigorous, evidence-based analysis of Canada’s defence needs and the resources required to effectively deliver upon them over a 20-year horizon.

Over the next 20 years, Strong, Secure, Engaged includes new funding for defence of $48.9 billion on an accrual basis, or $62.3 billion on a cash basis.

Defence investments will no longer be only planned in theory, then partially implemented or not implemented at all, because of imprecise or changing cost estimates. For the first time, this model is transparent, rigorously costed, and fully funded, including not just acquisition costs, but also operating and sustainment costs of new equipment. 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 may be approved in the future in order to ensure the Canadian Armed Forces can continue to fulfill its mandate in an evolving environment.

The Canadian Armed Forces must be able to plan well into the future. This policy ensures it can.

This funding is realistic and will provide the stability and certainty required to make defence investments that meet today’s needs while also planning for the future.

Investing in defence

The funding commitment is composed of two separate components, capital investments and operating funding, further sub-categorized as follows:

• Capital Investments – Acquisition – Costs related to the procurement of capital assets. Capital assets include equipment, infrastructure and information management/information technology-related equipment.
• Operating Funding – Operating and Sustainment – Costs include: personnel (Regular, Reserve and defence civilians); operating, including operating and sustainment costs for capital assets, both those currently in service and future acquisitions (training, domestic and deployed operations and other activities); and infrastructure (including maintenance, utilities and Payment in Lieu of Taxes (PILT)).
• Operating Funding – Additional Personnel – The incremental salary and operating costs attributed to the planned growth of 3,500 Regular Force personnel, 1,500 Reserve Force personnel and 1,150 defence civilians.
• Operating Funding – New Initiatives - Each initiative had a unique cost model created based on existing Defence costing frameworks and procedures. Four specific initiatives have been included in this policy: Defence Engagement Program Expansion; the Innovation for Defence Excellence and Security (IDEaS) initiative; Reserves – Enhanced Roles, Capability and Benefits; and the Total Health and Wellness Strategy.

Ensuring effective management of the defence budget

National Defence is responsible for the largest capital budget of any federal institution and its budget process is complex. As a vestige of history, National Defence effectively had two separate budgets.

1. Like all federal departments, National Defence is allocated funding on a cash basis through the Parliamentary Estimates process. While National Defence does have visibility on the level of funding that it would receive in the future, this budget could be affected based on yearly budget decisions, the level and number of international military missions, and changes to costs and timing of equipment acquisitions. This funding was used to pay annual operating costs (salaries, administration, building costs), the purchase of some capital equipment and infrastructure, and the costs of operating and maintaining this equipment.
2. In 2005-06, a new and separate part of National Defence’s budget was created using the accrual basis of accounting – a standard and accepted accounting method for the management of capital assets. This new source of funds was intended to be the long-term, predictable source of funds to be used for the acquisition and operation and maintenance of major new equipment, as well as force expansion.

Under this old model, the planning of the capital program was managed on both a cash and accrual basis. Further, some operating costs were covered by the cash budget, while others were sourced from the accrual budget. This introduced significant complexity in planning for major equipment projects, which was a fundamental challenge of large procurements of the past. Funding was announced for the purchase of new equipment such as aircraft and ships, but the life-cycle costs, including operating costs, were not adequately planned for in the procurement of equipment.

This new policy introduces some important changes to how the defence budget is managed to ensure that the Defence team has the flexibility to effectively manage key investments in defence capability. With this change, the Defence team and Canadians will have a full 20-year view of capital investments under a single, consolidated defence budget. A simplified process will be put into effect for the management and planning of capital expenditures. For the first time, the management of all funding related to the acquisition of all capital assets will be on a purely accrual basis, which accounts for the project development and acquisition cost of the equipment over the expected life of the asset. In addition, the operating and sustainment costs for the equipment will be earmarked as part of the planning process. This will enable better long-term planning of defence capabilities and help enhance the transparency of defence fiscal planning with Parliament.

In total, Strong, Secure, Engaged will invest an additional $48.9 billion over the next 20 years on an accrual basis – $33.8 billion for the acquisition of capital assets and $15.1 billion for operating requirements. Over this time period (2017-18 to 2036-37) total defence funding on an accrual basis is estimated to be $497.0 billion not including the costs of military operations (Figure 1).

Specifically, this additional funding will be coupled with four reforms:

1. Transformation of the defence funding model that clearly and transparently identifies the investments required to acquire new assets (capital budget) and those funds required to conduct the business of defence (operating budget).
2. Reform of Canada’s procurement model and adoption of life-cycle costing to ensure the Department of National Defence has not only the funding to procure new equipment, but also the funding to maintain and operate new equipment.
3. Implementation of rigorous costing of major equipment, including through Third-Party Reviews.
4. Publication of the next Defence Investment Plan in 2018, and further installments every three years thereafter, to ensure Canadians can clearly understand future changes to the budget and to deliver on the Government’s commitment to transparency, results, and accountability.

Strong, Secure, Engaged integrates additional funding flexibilities with respect to mission costs. While some operations are manageable 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 capability and caring for our people and their families are not compromised by the costs of operations.

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

Figure 1: Defence Funding – Accrual Basis^{figure 1 *}

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. While defence spending is an important part of ensuring appropriate defence capability, it is not the most effective measure of fair burden sharing. Within the Alliance, Canada continues to place a premium on tangible operational contributions, as well as demonstrating a commitment and capacity to deploy and sustain personnel in support of the Alliance.

As part of the Defence Policy Review, Defence conducted a study to ensure that the methodologies used by Canada to report defence spending as a percentage of gross domestic product to NATO were consistent with the eligibility criteria established by NATO and with those currently being utilized and reported by our Allies.

The 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 that has been incurred by other government departments. Recent consultations with NATO staff and our Allies have resulted in a clearer understanding of Canada’s defence spending. 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.

It should be noted that additional expenses related to services provided by Veterans Affairs Canada are not currently included. Canada will continue to consult with NATO officials to ensure that costs reported going forward are reflective of defence spending in support of NATO.

The investments in Strong, Secure, Engaged decisively reverse Canada’s declining defence spending in recent years. Total forecasted defence spending under this policy is expected to reach 1.40 percent of gross domestic product by 2024-25. It will also position Canada to exceed NATO’s target to spend 20 percent of defence expenditure on major equipment, which under this policy is forecasted to reach 32.2 percent in 2024-25.

Table 2 identifies the revised defence spending forecast as a percentage of gross domestic product and major equipment spending as a percentage of defence spending.

Rigorous costing and third-party review

The stable, realistic defence funding presented in this policy rests on the foundation of a rigorous, multi-stage, externally validated, costing process. National Defence worked with external global defence costing experts from Deloitte, who brought their expertise gained from defence reviews in allied nations, to provide advice and support to this unprecedented process. All costing methodologiesto support the vision of Strong, Secure, Engaged also underwent a third-party review conducted by five external accounting firms. 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, such as supporting infrastructure, training, maintenance and operating costs.

Ensuring transparency of the defence budget

To deliver on the Government’s commitment to transparency, results and accountability, the Government of Canada will publish the next Defence Investment Plan in 2018, and further plans thereafter. It will provide important planning direction to guide the major investments that provide the Canadian Armed Forces with the core capability to carry out its mandate. In particular, the Defence Investment Plan identifies major capital equipment and infrastructure spending and investments over $20 million for goods and services over a five-year period. This will provide a more transparent and important mechanism to demonstrate prudent stewardship of public resources. Further information on how the Defence team plans to ensure the transparency of the defence budget is provided at Annex A.

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