Vote-share bonds and unintended consequences

Economist Hans Gersbach has had a creative idea how to induce more responsibility in government spending: by introducing a new financial instrument called "vote-share bonds," which are government bonds whose seniority is tied to the vote-share that the policy it is supposed to fund has received in parliament. More specifically, vote-share bonds work like this:

Each government bond is tied to the share of the votes that its underlying budget deficit adoption has received in parliament. A government bond that has a higher vote-share than another is senior. This creates a ladder of relative seniority for which the vote-share is the organising principle. At the top of the ladder are the bonds with the highest vote-share. Any government funds available for servicing and repaying government debt will always be turned first to the top of the ladder to satisfy the claims of the bond-holders with the highest seniority. The other bond-holders are served sequentially by moving down the ladder.

In other words, different bonds issued by the same government will have different yields depending on the popularity of deficit spending that they are supposed to finance. One of the desirable effects of this, Gersbach says, will be the fact that

(...) minorities opposing further public indebtedness can make it more costly for the ruling government majority to issue debt. A minority cannot prevent the issuance of new government debt, but by opposing it, it can give it junior status, thereby inducing high risk premiums. Enhanced fiscal discipline would tend to decrease the average cost of borrowing.

This is the right way to think about incentivizing deficit control, but the details are not worked out properly. In fact, due to the fact that parliament parties can vote strategically, adopting Gersbach's idea could lead to there being more debt with the same seniority than would be issued if the status quo were unchanged. How? Consider this scenario:

Suppose the Congress is split 51%-49% in favor of the Republicans. Suppose the Republicans want to invade Iran but there's no money to do it so the policy would have to be financed through issuing bonds. Suppose also that invading Iran is popular among Republican voters and no one else; that is, it would receive a 51% majority of votes in Congress but no more than that. Things being the way they are, the policy would be voted through by Republicans, and financed through bonds with the same seniority and risk premium as any other government bonds. Now suppose we're in Gersbach's vote-share bond world. Republicans know that if they pass their favorite policy just with their own votes, without any help from the Democrats, the debt issued to fund it would be very expensive. So they offer Democrats a deal: You all vote for invading Iran, and in exchange for that we will vote for one of your pet deficit-increasing projects that everyone else hates, say subsidizing auto industry.

In our world, we'd see debt being issued only to finance invading Iran. In vote-share bond world we'd see debt being issued both for invading Iran and subsidizing auto industry, and bonds used to finance both policies would have very high seniority (because, assuming both those policies are very important to their respective partisan supporters, they could both be passed with 100% majority or very close to that). In other words, the situation would be strictly worse than it is now.