German government to approve 2026 budget with record investment and borrowing surge, sources say

By Maria Martinez

BERLIN (Reuters) -The German government will on Wednesday back a 2026 draft budget which includes record investment of 126.7 billion euros and borrowing of 174.3 billion euros as part of its fiscal bazooka for infrastructure and defence, finance ministry sources said.

Germany is throwing off decades of fiscal conservatism in the hope of reviving economic growth, modernising its crumbling infrastructure and scaling up military spending, as Europe's biggest economy has gone from economic powerhouse to the euro zone's laggard.

It is the only G7 economy that failed to grow for the last two years and the government forecast in the spring that it would stagnate again this year. The sources said that with the budget plans, the economic environment should improve noticeably over 2025 and 2026 compared with those forecasts.

The 2026 draft budget comes together with a medium-term financial framework until 2029, with the whole package expected to be approved by the cabinet.

The budget discussions will then start in parliament at the end of September before expected approval in both houses of parliament at the end of the year.

The 2026 draft budget, with total spending of 520.5 billion euros ($606.80 billion), includes 126.7 billion euros ($147.71 billion) in investments earmarked for the modernisation of the country.

That is an increase from 74.5 billion euros in 2024 and 115.7 billion euros in 2025.

BORROWING MORE THAN TRIPLED

The investment surge in 2026 and subsequent three years will be possible thanks to a special 500 billion euro ($583 billion) infrastructure fund and an exemption from debt rules for defence spending approved in March.

The special fund for infrastructure, which is also excluded from Germany's "debt brake" that limits borrowing to 0.35% of GDP, will add borrowing of 58.9 billion euros in 2026.

For defence, the 100-billion-euro special fund created by former Chancellor Olaf Scholz following Russia's invasion of Ukraine, which will be exhausted in 2027, will add 25.5 billion euros in borrowing in 2026.

In the core budget, borrowing will go up from 33.3 billion euros in 2024 to 89.9 billion euros in 2026, the sources said.

Adding those three components, total borrowing in 2026 will be 174.3 billion euros ($203.20 billion). It compares with total borrowing of 50.5 billion euros in 2024, under the previous government.

Interest expenses will rise more sharply than previously forecast, the sources said, forecasting an increase to 66.5 billion euros in 2029, which compares with the 61.9 billion previously expected.

Germany will raise defence spending to 3.5% of economic output by 2029, sources said on Monday.

After low spending following the end of the Cold War, Germany complied with the NATO defence alliance's target of 2% of GDP for the first time in three decades in 2024 due to Scholz's special fund.

NATO countries committed in June to spend 2.8% of GDP on defence in 2026 and then increase it to 5% - a new target to be achieved over the next 10 years, representing a jump worth hundreds of billions of dollars a year from the current goal.

Germany's total defence spending will go up from 95.1 billion euros ($110.90 billion) in the draft budget for 2025 to 161.8 billion euros ($188.67 billion) in 2029, the sources said.

Germany would be able to borrow a total 380 billion euros for defence between 2025 and 2029 thanks to debt brake reform from March, they said.

($1 = 0.8519 euros)

(Reporting by Maria Martinez and Holger Hansen; Editing by Alison Williams)