Budgets

Human behaviour is not so different from that of rats navigating a maze. Reward certain choices and we are more likely to repeat them; attach unpleasant consequences and we learn to avoid them. Whether driven by emotion, reason or self-interest, our decisions are ultimately shaped by incentives. And few are stronger than the desire to hand less of our money to the taxman. Which brings us to the Budget on 28 October.

For decades, we have known that an ageing population, rising healthcare costs and an expanding welfare state would place an increasingly heavy burden on public finances. None of this required extraordinary foresight, yet successive governments repeatedly postponed the difficult decisions. Today, pensions, healthcare, welfare and debt interest absorb almost £800 billion, or nearly 60% of government spending.

It is also no great mystery, that the longer these structural pressures remain unresolved, the more expensive they become, leaving increasingly little room for investment in education, infrastructure or defence. Yet politicians face incentives of their own. Addressing these problems requires unpopular reforms and short-term sacrifices, while their overriding priority is to win the next election. The politically rational choice is therefore often to postpone the economically necessary one.

And therein lies the irony. The political incentive to postpone spending reforms creates pressure to raise taxes, while higher taxes give people every incentive to change their behaviour. Abolish non-dom status and wealthy residents reconsider where they live. Raise capital gains tax and investors delay selling assets. The Treasury can forecast the revenues from its measures to its heart's content, but it is the incentives facing taxpayers that will determine what it collects.