By Michael Nienaber
BERLIN (Reuters) -The three German parties working to form a new coalition government are discussing higher federal borrowing next year to allow a one-time, multi-billion-euro injection into the government's climate investment fund, two sources told Reuters.
The centre-left Social Democrats (SPD), the ecologist Greens and the pro-business Free Democrats (FDP) face a massive spending problem as they agreed in exploratory talks to return to strict debt limits from 2023 and avoid tax increases.
To create more fiscal fire power, the parties are mulling a proposal to use the emergency clause for the debt brake rule in the constitution for a third consecutive year and take on more debt than the initially planned 100 billion euros ($115.92 billion) in 2022, two people familiar with the talks said on condition of anonymity.
"The idea is to super-charge the government's Special Energy and Climate Fund (EKF) with a one-time, debt-financed injection worth several billion euros which could then be tapped step by step over the coming years," one of the sources said.
The plan would allow parties to steer clear of creating off-budget investment vehicles, which had been floated as an alternative idea to circumvent debt limits and enable more public investment to speed up the shift towards a green economy.
The question of how to pay https://www.reuters.com/business/environment/climate-finance-could-make-or-break-cop26-summit-heres-why-2021-11-01 for climate transition pledges will be one of the central themes at the U.N. COP26 https://www.reuters.com/business/cop climate talks in Glasgow over the next two weeks.
While Chancellor Angela Merkel's government justified the suspension of the debt limits in 2020 and 2021 with the COVID-19 pandemic, the new government could now also point to the climate crisis to trigger the emergency clause, one of the sources said.
Finance Minister Olaf Scholz, who is in pole position to succeed Merkel following the SPD's election victory, took on record new debt of 130 billion euros last year and is eyeing unprecedented borrowing of up to 240 billion euros this year.
DEBT STRETCH?
Among the proposals to create more fiscal wiggle room is also the idea to push back the first repayment of coronavirus debt by five years from 2023 to 2028 and stretch the repayment period to three decades until 2058, the two sources said.
"This would be in line with the repayment schedule of the European Recovery Fund, so Germany would simply synchronise its national plan with Europe," one of the sources said.
This could create additional space in the budget of 2 billion euros per year from 2023 and nearly 10 billion euros per year from 2026 onwards, according to the sources.
The updated tax revenue estimates, due next week, will come in better than expected and create some additional buffer, which means the government will have to borrow less than the initally planned 240 billion euros this year, according to the sources.
To faciliate private-sector investments into a carbon-neutral economy, the three parties, which are currently trying to hammer out details of a coalition agreement in various working groups, are also looking into strengthening the role of Germany's KfW state development bank, party leaders have said.
In addition, the Federal Environment Office has urged parties to end climate-damaging state subsidies worth up to 65 billion euros a year such as a reduced tax rate for diesel, tax discounts for company cars and exemptions from energy taxes for industry.
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