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German cabinet agrees budget framework, hikes spending without net new debt

BERLIN (Reuters) - Germany plans to gradually increase state spending until 2021 without net new debt, sticking to its goal of running a balanced budget despite international calls to hike investment more strongly in infrastructure and defense.

Chancellor Angela Merkel's cabinet on Wednesday passed the preliminary framework for the 2018 federal budget and its fiscal plans until 2021 as suggested by Finance Minister Wolfgang Schaeuble.

Presenting the preliminary plans in Berlin, Schaeuble said it would be up to the next coalition government, due to take office after a federal election in September, to adjust the fiscal plans and agree on the final budget.

But Schaeuble, a senior member of Merkel's conservatives, made clear that he viewed it as a political achievement that Germany had managed to run a budget surplus since 2014.

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"At the end of September, we'll look back at a complete legislative period without net new debt," Schaeuble said, adding that it was important to keep public finances sustainable also in light of the demographic challenge of an aging society.

Germany plans to boost overall spending by 1.9 percent to 335.5 billion euros in 2018, with the extra money going mainly to fund refugee integration, development aid, defense and domestic security.

Defense spending will rise by 1.4 billion euros to 38.5 billion euros in 2018, under the plans - a figure that is projected to represent 1.26 percent of output, Schaeuble said. In 2016, the defense spending ratio stood at 1.18 percent.

TRUMP PRESSURE

U.S. President Donald Trump has called on Germany and other NATO members to accelerate efforts to meet the alliance's target of spending 2 percent of economic output on defense.

Public investment will edge down to 35.7 billion euros next year from 36.1 billion euros in 2017 before bouncing back to 36.2 billion euros in 2019.

In 2019-2021, the federal government aims to raise overall spending by an additional 20 billion euros to 355.6 billion euros.

With tax revenues expected to keep rising and borrowing costs to remain low, the cabinet's budget framework does not foresee the need for net new borrowing until 2021.

Schaeuble rejected international criticism about investment levels being too low, saying Germany was hiking spending in infrastructure while sticking to national and international budget rules.

Schaeuble also said he expected interest rates to rise in the medium term which would play into budget planning.

He reiterated that he saw scope for about 15 billion euros in tax cuts after the September election, adding that his focus would not be on reducing the sales tax.

Germany is heading into a closely contested federal election in September. A possible coalition government led by the center-left Social Democrats could put greater emphasis on investment.

This means that the budget plans for 2018 and beyond could be subject to revisions if a new coalition takes power.

(Reporting by Michael Nienaber and Matthias Sobolewski; Editing by Madeline Chambers and Gareth Jones)