Germany approves key targets for 2027 budget, higher defence spending in focus

* Defence spending to reach 3.1% of GDP in 2027

* Infrastructure and climate fund targets transport, digitalisation, hospitals for economic growth

* Total investment to be at 118.5 billion euros in 2027 draft budget (Adds quotes from chancellor, paragraph 5, finance minister, 10-11, 14, details on Ukraine support and figures on investment, 9, 12-13, 15-16)

By Maria Martinez

BERLIN, April 29 (Reuters) - The German government approved key targets for its 2027 budget on Wednesday, including total borrowing of 196.5 billion euros ($229 billion) as it aims to scale up spending on crumbling infrastructure and on defence.

This compares with 50.5 billion euros in 2024 under the previous government, before Germany threw off decades of fiscal conservatism last year in an effort to revive its moribund economy. This year's budget sees 180 billion euros in new debt.

The 2027 draft budget, part of a medium-term financial framework extending to 2029, allocates total spending of 543.3 billion euros, 3.6% more than in the previous year.

BUDGET FOCUS ON DEFENCE

The budget 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.

"Developments over the past year, including in Iran in recent months, show how important investments in our defence capability are," Chancellor Friedrich Merz told reporters.

Including the special fund for defence and funds for Ukraine, total defence spending is set to reach 144.9 billion euros in 2027.

This, together with other government defence expenditure, results in total spending equivalent to 3.1% of gross domestic product in 2027, in line with commitments to NATO. This is expected to hit 3.7% of GDP by 2030.

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, according to the key points approved on Wednesday.

Asked about the cut in support for Ukraine from 2028, Finance Minister Lars Klingbeil pointed to the 90 billion euro EU loan for Ukraine which had been blocked by Hungary under outgoing Prime Minister Viktor Orban, but which EU members have now approved.

Speaking at a news conference, Klingbeil added that the numbers included in the financial framework could change in future depending on Ukraine's needs.

INVESTING IN THE FUTURE

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 a 500 billion euro infrastructure fund and an exemption from debt rules for defence spending were 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.

"Our top priority is to secure jobs, create new ones, and ensure economic growth," Klingbeil said, adding that 2027 would be the third year of record investments.

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.

The special funds are excluded from Germany's "debt brake", which limits borrowing to 0.35% of GDP.

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-end.

(Reporting by Maria Martinez and Holger Hansen; editing by Matthias Williams and Gareth Jones)