Industry and Technology Committee on Oct. 8th, 2025

[The Chair, Liberal, Ben Carr]

Good afternoon, everybody. Welcome.

Here we are again, meeting for the second time on our defence industrial strategy study. This is meeting number seven of the Standing Committee on Industry and Technology.

This is a friendly reminder to protect the health and well-being of our interpreters. If you are using your earpiece, and if it's plugged in and not on your ear, please place it on the sticker in front of you. If it's not plugged in, don't worry about that. That's just relevant to those who have tables in front of them.

Colleagues, we're going to try to be effective and efficient today, as always. We have two witnesses with us here for the first hour of our meeting.

From the Office of the Parliamentary Budget Officer, we have the interim Parliamentary Budget Officer himself, Jason Jacques. We also have Christopher Penney, senior adviser, from the PBO.

Mr. Jacques, the floor will be yours for upwards of five minutes.

Following that, we will get into a line of questioning. Each member of the affiliated political parties here has an allotted amount of time. We'll begin with our colleagues from the Conservative Party and then go around the table.

If you have any questions at any point, you are certainly welcome to pose those to me. Otherwise, I'm going to let us get going.

Mr. Jacques, the floor is yours for five minutes.

[Jason Jacques, Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Thank you.

Good afternoon, Mr. Chair and committee members.

Thank you for the invitation to appear before you today. We're pleased to be adding content to the study of Canada's industrial defence strategy.

With me today I have senior advisor Christopher Penney, our office lead on the defence file.

In accordance with our legislative mandate to provide impartial independent analysis to help you fulfill your constitutional role of holding government accountable, our office prepares reports and analyses on the fiscal implications of Canada’s defence spending and major procurement programs.

In May 2022, we published our independent assessment, “The Industrial and Technological Benefits Policy: An Analysis of Contractor Obligations and Fulfillment”. This report analyzes transactions and investments under the industrial and technological benefits policy, also known as the ITB policy, for Canadian defence and security procurement.

Based on our analysis, we found that transactions under this policy for the period of 2015-19 totalled $18.3 billion. Of this amount, we found that almost half related to transactions that were not directly related to the production of military equipment purchased by Canada.

Furthermore, our analysis found that Canadian-owned firms accounted for about one-third of the total dollar value of ITB transactions with large partner firms.

We'll now answer your questions regarding our analysis of the industrial and technological benefits policy or other work done by the Office of the Parliamentary Budget Officer.

Thank you, Mr. Chair.

[The Chair, Liberal, Ben Carr]

Thank you very much, Mr. Jacques.

Mr. Guglielmin, the floor is your for six minutes, sir.

[Michael Guglielmin, Conservative, Vaughan—Woodbridge, ON]

Thank you both for being here today.

Mr. Jacques, your economic and fiscal outlook doesn't include the NATO commitment of 5% of GDP on defence by 2035. Is that correct?

[Jason Jacques]

That is correct.

[Michael Guglielmin, Conservative, Vaughan—Woodbridge, ON]

Your outlook then didn't include the full picture of Canada's fiscal position, considering that it not only didn't include the 5%, but also didn't include a large portion of the Liberal campaign promises.

[Jason Jacques]

It's important to look at the other side of what was also not included. We also did not include the potential savings from the comprehensive expenditure review currently being undertaken by the government. That could potentially offset some of the additional fiscal costs that will be incurred by the government. As well, with respect to the NATO 5%, something which I mentioned at the government operations committee, one of the major reasons we didn't include the ramp-up from 2% to 5% is that there is the potential for dual-use infrastructure. As to the extent to which Canada is already spending on infrastructure, under the new NATO 5% commitment that might be eligible as part of the new 5%, we don't know what that precisely looks like at this point.

[Michael Guglielmin, Conservative, Vaughan—Woodbridge, ON]

You also said in some of your assumptions that you made around this that the countermeasures that were in effect on September 5 would remain in place. There were some assumptions that the Canadian tariffs on goods from the U.S. will be gradually phased out. Is that correct?

[Jason Jacques]

That's correct.

[Michael Guglielmin, Conservative, Vaughan—Woodbridge, ON]

We learned today that not only do we not have a deal with the U.S. yet, but news out of the U.S. today said auto tariffs are going to remain in place. This means that potentially the outlook could be worse than anticipated.

[Jason Jacques]

It potentially could be worse. It potentially could be better. It's a very dynamic environment, and it's something—

[Michael Guglielmin, Conservative, Vaughan—Woodbridge, ON]

That's fair enough.

Given that the federal deficit is projected to be $68.5 billion this year and that Canada has an unsustainable debt trajectory, as you had mentioned, even before accounting for the very much-needed defence spending increase, to your knowledge, should Canadians be at all concerned that Canada might not be able to meet these important critical NATO defence commitments and potentially risk not keeping our commitments to our troops or allies?

[Jason Jacques]

With respect to the key question of sustainability, the debt-to-GDP ratio for the country cannot rise in perpetuity. What I pointed out at the government operations committee was that this is the first time in a long time that we've seen an upward trajectory for the debt-to-GDP ratio. Obviously, the government's aware of that and the government has space at this point to manage it.

The key point and I think the key takeaway that I highlighted was that it's a very challenging fiscal situation owing in large part to factors outside of the government's control and to external factors outside of the country at this point.

Yes, absolutely, it raises challenges for the government to make really important trade-offs.

[Michael Guglielmin, Conservative, Vaughan—Woodbridge, ON]

Given your stark warning that it's not a funny outlook, that it's unsustainable and shocking, what concrete fiscal adjustments would you think the government might need to make so that we can meet this very necessary and critical NATO defence spending commitment, and what happens if we don't make the adjustments required, just from a purely fiscal perspective?

[Jason Jacques]

I think, as I mentioned at previous committees, generically there end up being two options for the government, or any government, around budgeting: You can make adjustments on the expense side or you can make adjustments on the revenue side. Fundamentally, it does come down to a question of trade-offs.

[Michael Guglielmin, Conservative, Vaughan—Woodbridge, ON]

It's cut spending or raise taxes.

[Jason Jacques]

It's the same way that people would manage a household. You can't buy everything you want. You can't get everything you want. You have limited means. The government, like any household in this situation, is going to have to make trade-offs, just as Canadians need to make trade-offs.

[Michael Guglielmin, Conservative, Vaughan—Woodbridge, ON]

Your report highlights that debt interest charges will cost taxpayers $55.3 billion this year, already exceeding health care transfers. It will rise to $82.4 billion by 2030.

If we add this very important and critical NATO spending on top of this, what effect would this have on debt servicing costs?

[Jason Jacques]

Obviously, if you spend more money without a commensurate increase on the revenue side, then potentially you would need to raise that money through debt financing. If you raise it through debt financing, then you're going to be paying higher debt interest costs.

Again, something that I mentioned at the committee previously is that it's a forecast; it's not the future. If I were perfectly clairvoyant, I would be retired on a Pacific island with a helicopter pad at this point. I'm not, and the mandate of the office is to ensure that we are putting numbers into the public domain and making them available to parliamentarians so they have a sense of what the status quo looks like. I'm very optimistic that the status quo will not come to pass.

[Michael Guglielmin, Conservative, Vaughan—Woodbridge, ON]

I want to ask a question related to our other study on capital flight and productivity.

As mentioned, the federal deficit is now projected to reach $68.5 billion this year under Prime Minister Mark Carney. It's a significant jump from the $42.2 billion projected in the 2024 fall economic statement under former prime minister Trudeau. At that time, the $42.2 billion was so alarming that finance minister Chrystia Freeland resigned over it.

What does this sharp increase to the deficit say about Canada's fiscal sustainability moving forward? That sustainability affects investment, business confidence and overall productivity in the market.

You'll have to be quick.

[Jason Jacques]

I think a large part of the deteriorating deficit situation is just a natural reflection of what happens when the economy hits a period of uncertainty, the labour market becomes more challenging and automatic federal supports kick into place. People lose their jobs, unfortunately, and employment insurance is there to help them out and give them some sort of support. Inversely, the flip side of that on the revenue side is that when people lose their jobs, they're not paying personal income taxes, so you would expect automatically to see the deficit situation deteriorate.

[Michael Guglielmin, Conservative, Vaughan—Woodbridge, ON]

Thank you.

[The Chair, Liberal, Ben Carr]

Thank you, Mr. Guglielmin.

Ms. Acan, you have six minutes.

[Sima Acan, Liberal, Oakville West, ON]

Thank you, Mr. Chair.

Mr. Jacques, our government is making deliberate and targeted investments in Canada's strategic industries, from clean technology to advanced manufacturing, with the goal of building a more innovative and resilient economy. These are not short-term expenditures, but forward-looking investments designed to strengthen our industrial capacity and ultimately reinforce our long-term fiscal sustainability. Specifically, defence investments are critical to securing the safety of Canadians in a challenging global landscape. I believe you and fellow committee members agree with that.

Given that Canada continues to maintain one of the lowest debt-to-GDP ratios among the G7 economies, would you agree that Canada retains fiscal credibility and the necessary fiscal room to pursue these kind of strategic, growth-oriented, national defence investments, particularly when they are tied to innovation, long-term economic outcomes and the security of our nation?

[Jason Jacques]

Thank you for the question.

In response to it, I would start with a quote from the 2024 fall economic statement on page 38, which at that point indicated the following:

The government is committed to its fiscal anchor: to reduce the federal debt-to-GDP ratio over the medium-term. This metric is key not only for fiscal sustainability, but also to preserve Canada's AAA credit rating, which helps maintain investors' confidence and keeps Canada's borrowing costs as low as possible.