Pensioners add to UK deficit and national debt.

When I hurried to buy my tranche of the Pensioner Bonds for the Over 65s, generously issued by our Chancellor George Osborne last Thursday at the currently attractive 4% rate of interest, I was wryly aware that in doing so I was actually helping to add to the government deficit and the National Debt, both of which the Tories scream it is their number one priority to reduce.  What I hadn't thought through was the idiocy of the government's doing it in such an expensive way.  The hypocrisy of this is detailed in two blogs,
 http://www.taxresearch.org.uk/Blog/2015/01/17/osborne-the-newly-converted-fan-of-government-debt/ by  Richard Murphy of the Tax Justice Network, and
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2015/01/against-pensioner-bonds.html
 by Chris Dillow, which my friend John Cole has kindly brought to my attention.

First, let's be quite clear that the National Debt, the accumulation of government deficits over the years, is largely held internally and is not therefore a  "burden" on the economy as a whole.  These Pensioner Bonds provide a useful illustration.  By buying them we pensioners are lending to the government and so adding to the National Debt.  Since I already have  some National Savings Certificates I already own part of the National Debt.  If my application for the Pensioner Bonds is successful I shall own a bit more of it.

I shall receive interest on this money I have lent to the government.  I also pay taxes.  Some of those taxes will be used to pay me the interest.  What goes round comes round.  In the jargon it's known as the "Circular Flow of Income" and in economics lessons we draw pretty pictures to illustrate it.

National Savings, of which the Pensioner Bonds are part, constitute a fairly small part of the National Debt.  The bulk of government borrowing is done by the sale of bills and bonds ("gilts") to institutions such as private pension funds, insurance companies, banks and other financial institutions.  As Chris Dillow  points out, the current rate of interest necessary to attract buyers for gilts is a mere 0.6%.

So Osborne has set aside £10bn to be borrowed from we pensioners at 4%, (or 2.8% if we buy the 1 year bonds) when he could have borrowed it from the markets at 0.6%.  Dillow calculates that, if the whole of the £10bn  is taken up  then the government will be paying out £300m per year more in interest to pensioners than it would have had to pay if it had borrowed from the usual sources.

Financial sense this is not.

Both bloggers further point out the effects on the distribution of wealth  of the fact that  only the over 65s may buy these Bonds and benefit from  such a generous (by present standards) rate of interest. But everybody in the country pays tax - those who don't earn enough to pay income tax  pay VAT, duty on petrol, alcohol and cigarettes if they consume them, and sundry other taxes. So this is a transfer of wealth from everybody, including the young, to the elderly.  Some might call that a bribe.

Lest the Labour supporters get too self righteous about this wickedness, it is worth remembering that Gordon Brown gave us an even more obvious bribe when he doubled our Winter Fuel Allowance in 2000, with an election due in 2001.

Mature democratic politics this is not.