German Cabinet Approves 2025 Draft Budget with Record Borrowing, Defense Spending

Germany's cabinet approved a draft budget for 2025 and a medium-term finance plan that includes record investments aimed at stimulating economic growth and a significant increase in defense spending. The government plans to raise net new borrowing to €82 billion in 2025, rising to over €126 billion by 2029, totaling about €500 billion over five years to fund infrastructure, military investments, and economic stimulus measures. Defense spending is set to more than double by 2029, reaching 3.5% of GDP, reflecting heightened security concerns amid geopolitical tensions and pressure from U.S. President Donald Trump for Europe to increase military expenditure. The budget marks a historic shift, enabled by recent changes to Germany's debt brake law, allowing higher borrowing to support these priorities. Long-term bond yields rose as investors reacted to the increased government debt supply, with 30-year yields reaching their highest level in nearly a month. Despite the rising debt and interest payments, Germany's debt servicing costs remain lower as a share of GDP compared to other major European economies.