Ryan Bourne is the Head of Public Policy at the Institute of Economic Affairs.

‘Dear chief secretary, I’m afraid to tell you there’s no money left’. That twelve-word note left in the Treasury 
from Liam Byrne, Labour’s former Chief Secretary to the Treasury, to David Laws, his Coalition replacement, set the context for the debate about spending 
for the first half of this Parliament. In fact, it was extremely useful for a newly-formed Government
 who had come together with the aim of reducing the deficit primarily through restraining public expenditure.

Public sector workers want a pay rise? ‘There’s no money left’. Pushing through a desirable but difficult 
welfare eligibility change? ‘There’s no money left’. Making significant cuts to local government? ‘There’s 
no money left’. Whatever you think about this line of argument, it’s clear that ‘we have to do this, because 
we are simply skint’ is politically a very powerful message.

Of course, in reality governing is about choices. Over the weekend, George Osborne e
xercised his choice by extending the opportunity for over-65s to buy so-called ‘Guaranteed growth bonds’
 – offering elderly savers market-busting returns. This has been both widely heralded as politically astute
 or condemned as a cynical electoral move – both for the same reason, namely that the beneficiaries (the 
elderly, and in particular the wealthy elderly) are more likely to vote.

Yet can it really be considered politically astute to provide such clear evidence that the ‘there’s no money
 left’ or ‘we’re all in this together’ arguments are merely rhetorical? Think about what the pensioner bonds
 policy is. In effect, it is a decision by government to borrow at more expensive rates than it needs to 
in order to provide a guaranteed market-beating return to those who take up the offer.

No wonder demand 
for the bonds has been so high! It is a costly fiscal transfer from the broad body of taxpayers to the rich
 and old. What could be a conservative justification for a policy such as this?
There’s certainly nothing fiscally conservative about it. It adds to spending and borrowing. The Government 
can borrow on the gilt market by issuing three-year bonds with yields of 0.6 per cent. A three-year ‘Guaranteed
 Growth Bond’ gives a return of 4 per cent.

So the Government is borrowing more expensively than it needs
 to, to the detriment of taxpayers. For the original policy, this ‘cost’ could have been to the tune of around
 £300 million for the £10 billion of bonds on offer, though the extension will mean that the fiscal cost 
is higher still.

In the grand scheme of things, with government spending around £730 billion this year,
 one could suggest that this is a tiny proportion, but when one considers that this sum is significantly higher 
than, or equivalent to, some of the most controversial welfare changes which have in part been justified
a s money-saving measures necessary to bring down the deficit, you begin to see how the ‘there’s no money
left’ line of argument could unravel pretty quickly.

Conservatives should be concerned about the inter-generational aspect of all this too. This policy is targeted
 specifically at the elderly and of course adds to a long-line of policy decisions which have been favourable 
to pensioners through the course of this Parliament. The triple-lock on the state pension has little to
 no economic rationale either, and simply locks-in a ratchet of ever-increasing proportions of national output
being spent on a Pay-As-You-Go state pension scheme, financed by current taxpayers.

Remarkably, we still
 have a raft of universal pensioner benefits in the form of the Winter Fuel Allowance, free bus passes and 
TV licences. And the Government has decided to make state funding of social care more generous through implementing 
the Dilnot reforms – in effect, subsidising inheritances from the current elderly to their children. When
 we are still borrowing as much as £96 billion a year, with the stated need for much more in the way of savings  
(particularly from the welfare budget) and with the ageing of the population, it would seem both fiscally
sensible and morally right to cease insulating pensioner spending from the need for cuts in the next Parliament.

Some Conservatives claim that the pensioner bonds policy in particular merely corrects for other actions
of the state elsewhere. Extraordinary monetary policy and low interest rates have suppressed returns 
for savers, so the argument goes, and pensioners are the most reliant on savings income. What’s more, because 
people are retired and not working, it is much more difficult for them to adjust their behaviour to find
 other ways of boosting their income. Therefore support for savers, specifically pensioners, helps to alleviate
 some of the pressure on this group.

Let’s leave aside for a moment that the effect of recent monetary policy on pensioners is hotly disputed.
Yes, rates have been low, but QE has boosted asset prices, too, and most proponents of it would argue that this has led 
to much stronger growth than we would otherwise have seen.

But is correcting for one policy with another 
the right thing to do? From the Conservatives’ stated position, it is incoherent. George Osborne has called
 himself a ‘monetary activist’ and been supportive of QE. However, as Chris Dillow has noted, one of the mechanisms 
through which QE is supposed to work is to encourage people to invest in riskier assets to lower borrowing 
costs to firms. Now the government, for pensioners at least, is undermining this by providing safer guaranteed
 returns in government bonds. They are crowding out other investment, and with it the concept of individual 
responsibility for those investments.

All of these points considered then, it’s difficult not to conclude that the only real justification for
 the policy is naked political opportunism or throwing money at client groups – a practice that many conservatives
 rightly attacked Gordon Brown for. The problem for the Conservatives is that, with policies such as this,
they are directly undermining their own economic arguments elsewhere. It may well be that it helps electorally,
 but when it comes to the next spending review, they should expect to see policies like this thrown back 
at them.