UPDATE 3-Germany to borrow close to 200 billion euros in defence-heavy budget, sources say

This compares with 50.5 billion euros in 2024 under the previous government, before Europe's biggest economy threw ‌off decades of fiscal conservatism last year in a bid to revive growth, modernise crumbling infrastructure and scale up military spending. DEFENCE IN FOCUS The budget also features a strong commitment to defence spending, which is set to climb to 105.8 billion euros in 2027 from 82.7 billion euros in 2026 in the core budget, the sources said. Including the special fund for defence and funds for Ukraine, total defence spending is planned ‌to reach 144.9 billion euros in 2027.

​The German government is working on a draft budget for 2027 which includes total borrowing of 196.5 billion euros ($229.73 billion) as it aims to bolster infrastructure and defence, sources told Reuters on Tuesday. This compares with 50.5 billion euros in 2024 under the previous government, before Europe's biggest economy threw ‌off decades of fiscal conservatism last year in a bid to revive growth, modernise crumbling infrastructure and scale up military spending.

DEFENCE IN FOCUS The budget also features a strong commitment to defence spending, which is set to climb to 105.8 billion euros in 2027 from 82.7 billion euros in 2026 in the core budget, the sources said.

Including the special fund for defence and funds for Ukraine, total defence spending is planned ‌to reach 144.9 billion euros in 2027. A further increase to 179.9 billion euros in the core budget is planned by 2030, the sources said.

This, together with other government defence expenditure, results in ‌a NATO quota of 3.1% in 2027, which is expected to reach 3.7% of GDP by 2030, the sources said. NATO leaders agreed at a summit last year to spend 5% of GDP on defence and related investments by 2035. Germany will continue supporting Ukraine with 11.6 billion euros in 2027 and 8.5 billion euros per year between 2028 and 2030. SPENDING SURGE

The 2027 draft budget, part of a medium-term financial framework extending to 2029, allocates total spending of 543.3 billion euros, sources ⁠said, 3.6% ​more than in the previous year. The spending surge is ⁠supported by a 500 billion euro infrastructure fund and an exemption from debt rules for defence spending approved last year.

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 110.8 billion euros, with 58.2 billion euros borrowed on top through the infrastructure fund and 27.5 billion euros ​through the special fund for defence approved by former chancellor Olaf Scholz after Russia's invasion of Ukraine. Special funds are excluded from Germany's "debt brake" that limits borrowing to 0.35% of GDP.

Including ⁠the special funds, total investment will be at 118.5 billion euros in the 2027 draft budget, 37.6 billion euros more than in the fiscal plan before the spending spree was approved. CLOSING THE GAP

Germany's budget had a projected shortfall of 34.3 billion euros ⁠for ​2027 that the government will be able to close thanks to several savings measures and extra borrowing, the sources said. For 2028, the financial plan has more than halved the shortfall from 63.8 billion euros to 29.1 billion euros but further structural reforms will be needed to close the gap.

One of them is a planned reform of the statutory health insurance system, which, according to a ⁠new draft by Health Minister Nina Warken seen by Reuters, would result in savings of 16.3 billion euros next year. The cabinet is expected to approve a draft law with this reform on ⁠Wednesday.

Furthermore, a tax on sugary drinks is planned ⁠from 2028. Its estimated annual revenue of around 450 million euros is to flow into the statutory health insurance system rather than into the budget. Following the agreement on the key points on Wednesday and cabinet approval of the first draft in July, budget discussions will commence in parliament in September, ‌with final approval anticipated by year's ‌end.

($1 = 0.8554 euros)