Oh, Canada Get Real
Segment #1016
Canada’s Welfare State Has Been Subsidized by American Defense
Canada presents its welfare state as proof that a country can provide universal healthcare, public pensions and extensive social benefits while maintaining a prosperous economy.
But that story omits an uncomfortable financial reality: Canada has been able to spend more on domestic programs partly because it spent far less than it should have on national defense.
Canada did not finance its welfare state solely through economic strength and taxation. It also benefited from an indirect defense subsidy supplied by the United States. By repeatedly underspending on NATO, postponing military modernization and allowing important NORAD capabilities to deteriorate, Ottawa preserved billions for popular domestic programs while shifting part of the cost and risk of continental defense onto Americans.
Defense Spending Is a Political Choice
Every government must divide limited tax revenue among competing priorities. Money spent on fighter aircraft, radar systems, ammunition and military personnel cannot also be spent on healthcare, pensions or housing subsidies.
For decades, Canadian governments avoided this tradeoff by assuming the United States would continue carrying a disproportionate share of Western defense. Canadians received the security benefits of living beside the world’s most powerful military without paying the full cost of defending their own territory.
Washington did not directly finance Canadian social programs. American taxpayers instead funded military capabilities that also protected Canada, giving Ottawa more freedom to spend its own revenue elsewhere.
Canada Repeatedly Fell Short
NATO’s previous benchmark required members to spend at least 2% of GDP on defense. Although that objective was established in 2006 and reaffirmed in 2014, Canada remained below it for years.
Chronic underspending contributed to personnel shortages, inadequate ammunition, aging equipment and delayed procurement. Canadian military personnel continued making valuable contributions to NATO missions, but successive governments repeatedly asked them to fulfill international commitments without providing adequate resources.
The same pattern affected NORAD, the joint Canadian-American command responsible for defending North American airspace. Canada allowed vital northern surveillance systems to age even as Russia and China developed more advanced missiles and other Arctic capabilities.
Ottawa has now committed C$38.6 billion over 20 years to NORAD modernization. The plan includes over-the-horizon radar, satellite surveillance, communications systems, northern infrastructure and modern weapons.
These investments are necessary, but they do not erase decades of deferred modernization. Nor does announcing long-term funding guarantee that Canada will acquire and deploy the required capabilities quickly enough.
The New NATO Commitment Changes the Arithmetic
At the 2025 NATO summit, members agreed to reach a much more demanding target by 2035:
3.5% of GDP for core defense
As much as 1.5% for broader defense and security investments
Meeting that commitment will require Canada to fundamentally reorder its priorities. The additional spending must come from higher taxes, slower growth or reductions in domestic programs, larger deficits, or substantially stronger economic growth.
That choice comes as Canada faces an aging population, rising healthcare expenses, housing shortages and weak productivity. Rapid population growth also requires additional spending on schools, hospitals, transportation and housing.
Immigration can strengthen the tax base when newcomers quickly find productive employment and earn good incomes. But simply increasing the population does not solve the problem if economic output per person stagnates while public-service costs rise.
American Patience Is Wearing Thin
American voters increasingly question why the United States should shoulder a disproportionate defense burden while wealthy allies reserve more of their resources for domestic benefits.
Canada is not an impoverished country incapable of defending itself. It is a wealthy country whose governments repeatedly chose other priorities. From Washington’s perspective, the issue is therefore one of fairness and reliability.
An alliance cannot remain healthy when one member treats collective defense as primarily an American responsibility while treating domestic social spending as untouchable.
The Bill Is Coming Due
Canada’s welfare state was not directly financed by American taxpayers, but it was easier to sustain because Canada consumed American protection at a discount. Ottawa enjoyed financial flexibility that would not have existed had it consistently paid the full cost of its NATO and NORAD responsibilities.
That period is ending. Russian aggression, Chinese military expansion, Arctic competition and advanced missile threats make continued underinvestment increasingly dangerous. Washington is also becoming less willing to accept promises of future Canadian spending in place of capabilities needed today.
Canada must now decide whether it can pay for both the welfare state it wants and the defense a sovereign country requires.
If Ottawa meets its NATO and NORAD commitments, pressure on domestic spending and taxation will intensify. If it fails again, Canada will further damage its credibility with the United States and its other allies.
For decades, Canadian governments postponed this choice. They protected politically popular benefits while allowing military obligations to accumulate.
Now the defense bill is coming due—and Canada may discover that its welfare state is considerably more expensive once Canadians must pay the full cost of protecting it.
Sources:NATO’s 5% defense commitment and Canada’s NORAD modernization plan.
Tariffs of the Past
Historically, Canada enjoyed exceptionally low—usually zero—tariffs when selling goods into the United States.
The preferential treatment developed in stages:
Before 1989, Canada already benefited from relatively low U.S. tariffs under the postwar GATT trading system.
The Canada–U.S. Free Trade Agreement, effective in 1989, began eliminating most bilateral tariffs.
NAFTA, effective in 1994, completed most of that process and integrated Canadian and American manufacturing and energy markets.
USMCA/CUSMA, effective in 2020, preserved duty-free treatment for goods meeting North American rules of origin. USTR overview
The historical norm was virtually tariff-free trade, not broad punitive duties. That makes the current 50% U.S. tariffs on selected Canadian products a major break from the previous relationship. Canada is responding as though the United States has withdrawn a long-standing privilege, while the Trump administration argues that Canada used its privileged access while discriminating against American alcohol, dairy and automobiles.
The hard political reality for Canada is that the relationship was never economically equal. Canada depends far more heavily on access to the American market than the United States depends on Canada. Retaliatory tariffs may demonstrate resolve, but they also raise Canadian costs and risk provoking a much larger trading partner.
Alberta is Not Happy With Ottawa and That Matters
Yes. Alberta’s dissatisfaction with Ottawa matters far more economically than a typical provincial-federal dispute, because Alberta is one of the engines of Canada’s export economy and federal tax base.
Alberta’s leverage comes primarily from energy. In 2025, crude oil alone accounted for C$119.2 billion of Alberta exports, while crude oil plus hydrocarbon gases represented 73.6% of all Alberta merchandise exports. About 85.4% of Alberta’s exports went to the United States. (Parliamentary Library) Canada also produced a record amount of crude in 2025, with Alberta’s oil sands accounting for by far the largest portion. (Statistics Canada)
There is also an important distinction about the money Alberta "sends Ottawa." Alberta does not write Ottawa an equalization cheque. Federal taxes are collected from individuals and corporations across Canada, and because Alberta historically has had relatively high incomes and corporate profits, Albertans have often paid considerably more federal revenue than they receive in federal spending. Meanwhile, Alberta receives no Equalization payment; for 2026–27 it is scheduled to receive about C$9.24 billion in major federal transfers, principally health and social transfers. (Canada)
And this has become much more than theoretical political grumbling. Alberta now has an independence-related referendum scheduled for October 19, 2026. Recent reporting puts support for separation at roughly 30–35%—still a minority, but high enough that Ottawa cannot simply dismiss it. (The Wall Street Journal)
The timing is particularly interesting because Ottawa needs Alberta economically at the same time Canada is in a serious trade confrontation with the United States. Canada-U.S. trade negotiations collapsed this month, while Washington has imposed major tariffs and Canada is preparing retaliation. (Financial Times)
At the same time, Alberta's petroleum resources give it unusual strategic importance. There is renewed discussion of pipelines and expanded access to U.S. and Pacific markets. The proposed Prairie Connector, for example, could move roughly 550,000 barrels per day from Alberta toward Wyoming, using some previously installed Keystone XL infrastructure. (Reuters)
So I would frame the situation this way:
Alberta has a stronger bargaining position against Ottawa in 2026 than it has had in years. Ottawa wants Canadian unity, increased energy production, export diversification and additional pipeline capacity at precisely the moment when a significant minority of Albertans are questioning whether remaining in Confederation serves Alberta's interests.
But there is a major counterweight: Alberta also benefits enormously from being inside Canada—a common currency, banking system, national market, federal programs, defense, international trade agreements and established pipeline/export arrangements. Separation would raise extremely difficult questions concerning federal debt, pensions, Indigenous treaty rights, borders, pipelines and access to tidewater.
The really interesting question, therefore, isn't simply "Will Alberta leave Canada?" I think the more consequential question is "How much could Alberta extract from Ottawa by credibly threatening to leave?"
That could involve pipeline approvals, carbon policy, federal energy regulation, equalization reform, provincial control over taxation and pensions, and potentially a substantially different federal-provincial relationship.