BERLIN (Reuters) - Germany is considering ditching its long-cherished balanced budget policy to help finance a costly climate protection program with new debt, a senior government official said.

The Brandenburg Gate is reflected in a puddle in Berlin, Germany, August 8, 2019. REUTERS/Fabrizio Bensch - RC18D5D4F010

Chancellor Angela Merkel’s government has managed to raise public spending without incurring new debt since 2014 thanks to an unusually long growth cycle, record-high employment, buoyant tax revenues and the European Central Bank’s bond-buying plan.

But as Germany’s borrowing costs sink to new lows almost daily and its economy cools in light of weaker foreign demand and bruising trade disputes, domestic and international calls are becoming louder to provide extra fiscal stimulus by running a small deficit again.

“The challenge now is how to shape such a fundamental shift in fiscal policy without opening the floodgates for the federal budget,” the official, with knowledge of internal discussions in the finance ministry, told Reuters on condition of anonymity.

“Because once it is clear that new debt is no longer taboo, everyone raises a hand and wants more money.”

For that reason, Berlin would link and limit any new debt strictly to the climate protection package that Merkel’s cabinet is expected to seal next month, the official said.

Merkel’s coalition government wants to cushion the effects of a planned exit from coal over the next two decades by pouring at least 40 billion euros ($45 billion) into affected regions and help them manage the shift away from fossil fuels.

The coalition’s junior partner, the center-left Social Democrats (SPD) and their Finance Minister Olaf Scholz, are also advocating payouts to ease the social effects on low-income families of a new carbon emissions pricing system.

‘FULL FORCE’

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A finance ministry spokesman declined to comment.

But he pointed to a ministry statement saying the fight against climate change was a huge challenge that the government wanted to tackle with “full force”.

Coalition parties want to agree the next steps at the climate cabinet’s next meeting on Sept. 20, the ministry said in the statement. It added that a lot of money was already made available to finance climate measures and that the planned CO2 pricing mechanism should bring additional revenues.

Still, the statement did not rule out new debt after German media also reported that such a move was an option.

“The black zero (balanced budget) is no longer tenable,” a senior SPD member told Reuters. He pointed to additional costs of planned climate protection measures that had already added up to more than 30 billion euros until 2024.

“We need to invest more, especially into infrastructure and climate protection,” the senior SPD member said.

Under a constitutional amendment known as the debt brake, the federal government can borrow new debt up to the equivalent of 0.35% of gross domestic product. This would be roughly 5-10 billion euros per year, depending on some special factors.

The finance ministry is now toying with the idea of allowing the government’s energy and climate fund to issue new debt in line with the debt brake rules, the official said. The new debt instrument could be issued and marketed as “green bonds”.

‘NO FETISH’

Merkel and Scholz have repeatedly defended the goal of a balanced budget, arguing that it is important to reduce debt in economic good times and not to burden future generations with even more debt in light of Germany’s rapidly aging society.

A source close to Merkel cautioned that the issue of new debt had not been on the agenda.

Eckhardt Rehberg and Hans Michelbach, senior lawmakers of Merkel’s conservatives, both said they wanted to stick to the goal of incurring no new debt.

While SPD budget lawmaker Johannes Kahrs also distanced himself from the idea, members of the party’s left wing called on Scholz to boost investments with new debt.

“The (balanced budget) should not be an end in itself or even a fetish,” SPD finance lawmaker Cansel Kiziltepe told Reuters.

“We should go for an economically wise policy. And that means we need to invest in economic downturns.”

The move comes after yields turned negative even for 30-year German bonds, meaning investors actually pay the German state a premium to lend it money over a long period. It also chimes with international efforts to limit the effects of global warming.

A United Nations report on the effects of climate change concluded on Thursday that global meat consumption must fall to curb global warming, reduce growing strains on land and water and improve food security, health and biodiversity.