Exclusive-German draft budget foresees more than €203 billion in borrowing, document shows

By Sabine Siebold, Maria Martinez and Holger Hansen

BERLIN, July 3 (Reuters) - Germany plans to lift 2027 borrowing to more than €203 billion ($232 billion), according to the budget draft seen by Reuters on Friday,  a sharper rise than previously signalled, as Berlin ramps up investment and defence to shield its sluggish economy from war-related energy shocks and years of underinvestment.

Borrowing is up from the €196.5 billion signalled in April and far above the €50.5 billion in 2024 under the previous government, before Germany threw off decades of fiscal conservatism last year to revive its moribund economy.

The budget draft assumes the Middle East conflict will ease during the summer but warns if the Strait of Hormuz or oil production capacities remain disrupted longer, there would be "far-reaching consequences" for the German economy.

The 2027 draft budget, part of a medium-term financial framework extending to 2030, allocates total spending of €555.4 billion, more than the €543.3 billion approved in April.

Total investment will be €117.5 billion, nearly €40 billion more than originally planned. This increase comes after the approval of a €500 billion fund for infrastructure and a rule change that allows defence spending to be excluded from debt limits.   

Germany's special infrastructure and climate fund will focus primarily on transport, digitalisation and hospital infrastructure, underscoring where Berlin sees the most urgent need to modernise Europe's largest economy after years of underinvestment.

New borrowing in the core budget is expected to rise to €118.7 billion, with €54.9 billion borrowed on top through the infrastructure fund and €30 billion through the special fund for defence approved by former Chancellor Olaf Scholz after Russia's 2022 invasion of Ukraine.  The defence fund ends in 2027.

Core defence spending is set to climb to €109 billion in 2027 from €82 billion in 2026 in the core budget. Adding €11.6 billion in funds for Ukraine and €9.4 billion in other security-related spending, such as civil protection, intelligence and IT protection, defence spending rises to €130.1 billion after rounding. 

Cabinet approval of the first draft is expected on Monday, when the budget will be officially presented. After the summer recess, budget discussions will commence in parliament in September, with final approval anticipated by year-end.

($1 = 0.8740 euros)

(Reporting by Sabine Siebold, Maria Martinez and Holger Hansen, Editing by Friederike Heine and Rod Nickel)