By Maria Martinez
BERLIN (Reuters) -The German cabinet on Wednesday approved a 2026 draft budget featuring record investment and three times as much borrowing as last year as it aims to bolster infrastructure and defence.
Europe’s largest economy, which has gone from powerhouse to euro zone laggard, is throwing off decades of fiscal conservatism in an effort to revive growth, modernise crumbling infrastructure and scale up military spending.
The government will borrow 174.3 billion euros ($200 billion) in 2026 compared with 50.5 billion euros in 2024 under the former government, while investment will be at 126.7 billion euros, the highest ever.
“It is right that we invest in our security and that we address our investment backlog that has built up over many years,” Finance Minister Lars Klingbeil told reporters in Berlin.
Interest expenses will rise more sharply than previously forecast, with an increase to 66.5 billion euros in 2029, which compares with the 61.9 billion previously expected.
The 2026 draft budget, part of a medium-term financial framework extending to 2029, allocates total spending of 520.5 billion euros.
The planned investments mark a 10% increase over 2025 and follow a 55% increase compared to 2024.
CUTS NEEDED
Despite the planned total new debt of 851 billion euros in the period from 2025 to 2029, there is still a deficit of around 172 billion euros for the years 2027 to 2029.
In the draft budget law, all ministries are called to exercise strict spending discipline. “This means not only having to refrain from spending requests, but also questioning what already exists,” the law says.
Klingbeil said he expects the economic measures of the government will revive growth, strengthening revenues and narrowing the deficit of the coming years. However, cuts will also be needed.
“Everyone knew that things would get serious in 2027,” Klingbeil said. “That’s why I made it really clear in the cabinet, so that no one could say they didn’t know. Now it’s time for everyone to start saving properly.”
INVESTMENT SURGE
The investment surge is supported by a 500 billion euro infrastructure fund and an exemption from debt rules for defence spending approved in March.
The special fund for infrastructure, which is excluded from Germany’s “debt brake” that limits borrowing to 0.35% of GDP, will add borrowing of 58.9 billion euros in 2026.
Germany plans 117.2 billion euros in defence spending in 2026, an amount that will go up to 161.8 billion euros in 2029, the mid-term fiscal plan shows.
Berlin would be able to borrow a total 380 billion euros for defence between 2025 and 2029 thanks to debt brake reform from March.
Following cabinet approval, budget discussions will commence in parliament at the end of September, with final approval anticipated by year’s end.
($1 = 0.8677 euros)
(Reporting by Maria Martinez, Holger Hansen and Christian Kraemer, editing by Kirsti Knolle, Miranda Murray, Alexandra Hudson, Philippa Fletcher)
