Adds increase in interest payment from press conference

By Maria Martinez

BERLIN, June 24 (Reuters) - Germany's cabinet approved on Tuesday a draft budget for 2025 and a budget framework for 2026 with record investments that will also double the amount spent on interest payments by 2029.

To stimulate growth after Europe's biggest economy failed to grow for two consecutive years, the drafts include investments of 115.7 billion euros ($134 billion) in 2025 and 123.6 billion euros in 2026, up from 74.5 billion euros in 2024.

"By 2029, we will increase the federal government's annual investments to almost 120 billion euros per year," Finance Minister Lars Klingbeil said on Tuesday.

However, interest payments on debt will also rise fast, doubling from 30 billion euros to 52.5 billion euros in 2028 and 61.9 billion euros in 2029, finance ministry state secretary Steffen Meyer said on Tuesday.

In 2029, interest payments will represent close to 10% of a budget of 573.8 billion euros.

Germany still spends less on debt interest as a share of GDP than other major European economies such as France, Britain and Italy, according to International Monetary Fund figures , and despite the projected rise, this trend is likely to continue.

Germany's 30-year government bond yield DE30YT=RR rose 8 basis points to 3.065% and its 10-year yield DE10YT=RR rose 5 bps to 2.60% on Tuesday after the budget details were presented.

The draft budget for 2025 also includes the mid-term financial plan until 2029, which shows that Germany will raise defence spending to 3.5% of economic output by 2029, funded through a nearly 400-billion-euro borrowing programme.

Germany's total defence spending will go up from 95 billion euros in the draft budget for 2025 to 162 billion euros in the budget framework for 2029.

This investment surge will be possible thanks to a special 500-billion-euro infrastructure fund and an exemption from debt rules for defence spending approved in March.

"With this budget and the 500-billion-euro investment fund, we are setting in motion what we need now to ensure new economic strength, make our country modern and future-proof and to enable safe living in Germany in the future as well," Klingbeil said.

From 2025 to 2029, Germany will borrow a total of 500 billion euros for its budgets, with additional 270 billion borrowed through its infrastructure fund, according to the draft budget and mid-term financial plan.

Adding the funds to be borrowed to a defence fund created by the previous government when Russia invaded Ukraine in 2022, total borrowing in the five-year period would rise to 847 billion euros.

After former chancellor Olaf Scholz's coalition collapsed in November, the last government ran out of time to pass the 2025 budget. Germany has been operating on a provisional budget since the start of the year.

The budget committee will finalise details of the 2025 budget in September, when it should also be approved by lawmakers.

The first draft of the 2026 budget should be approved on July 30. It is to be discussed in parliament in September, then approved in the lower house of parliament in November and the upper house in December, following the usual schedule.

($1 = 0.8626 euros)

(Reporting by Maria Martinez; editing by Matthias Williams and Toby Chopra)

((maria.martinez@thomsonreuters.com;))