By Maria Martinez
BERLIN (Reuters) -The German cabinet on Wednesday approved a 2026 draft budget featuring record investment of 126.7 billion euros ($146.41 billion) alongside borrowing of 174.3 billion 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.
Borrowing in 2026 will be more
than triple 2024's 50.5 billion euros under the former government.
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.
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.
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 = 0.8654 euros)
(Reporting by Maria Martinez and Holger Hansen, editing by Kirsti Knolle, Miranda Murray, Alexandra Hudson)
