Pensioner bonds and government debt

Pensioner bonds were launched this week. These are three year savings bonds available to those aged over 65 and paying an interest of 4%. There is also a one year bond paying 2.8%. George Osborne hailed the launch, saying:

“Our economic plan involves supporting savers and I’m delighted to report that it is proving hugely popular.”

Last week though, David Cameron said their economic plan was all about getting the deficit down and ensuring the government spent less on debt interest so it could continue to spend on things like the NHS. On his blog yesterday, Chris Dillow sets out some issues he has with these new bonds:

“Which interest rate would you rather borrow at – 4% or 0.6%? It sounds like a moronic question. Not if you’re the Chancellor, it’s not. In launching pensionerbonds yesterday which pay 4% pa over three years, he is choosing to borrow at a much higher rate than the 0.6% charged by the gilt market.

This is costing the tax-payer money. If, as is likely, all of the £10bn bonds on offer are bought, the government will be paying almost £300m a year more in interest than it would if it borrowed in the gilt market*.

To put this in context, it is three times as much as the government is saving from the cap on benefits. And it is almost as much as it is saving from the bedroom tax.”

Chris goes on to say:

“What’s going on here is simple. Osborne is channelling tax-payers’ money to a favoured client group. There’s a word for this – corruption. This is the sort of thing we expect in Uzbekistan or Nigeria, not a western democracy.”

You would think pointing this out would be a slam dunk for Labour. For all the talk about the Coalition keeping interest rates low, when it comes to giving out bribes right before a general election, they are quite happy to issue new government debt at over 6 times the current going rate of interest! As far as I can tell though, Labour have kept pretty silent so far.