Speculation about the tax rises in the budget has reached peak hysteria. Far less attention, however, is being paid to the effect of Rachel Reeves’s policy changes on the economy.

One of the many pitfalls of the design of the UK’s set piece fiscal event is that most of the government’s energy is consumed on how to meet its fiscal rules rather than what it wants to achieve with its historical mandate. We are in year two of the Labour government and the perverse logic of the fiscal rules has long overtaken these bigger questions.

Last year’s decision to increase employers’ national insurance contributions is a cautionary example of upside-down policymaking, where economic considerations are subservient to political demands. Reeves opted for the national insurance increase to avoid an explicit breach of her manifesto promise not to raise the main taxes on working people. It was also a sizeable revenue-raiser and one that was chosen to avoid the wrath of the parliamentary Labour party.

Less care was given to the effect on the jobs market, where the combination of higher national wages and new payroll taxes targeting low-paid employees chilled employment prospects. Raising national insurance was a double whammy for the economy but also fed into higher prices. Large employers in sectors like food and retail passed on their employment bills to consumers at a time when cost of living pressures had not abated and the Bank of England needed more, not less, encouragement to cut interest rates.

So it came to pass; the labour market has slowed this year but the Bank has prevaricated on lowering borrowing costs. The latter has had a direct effect on the government’s fiscal fortunes in the form of high debt-servicing costs and a weaker economy this year. Both variables are used by the Office for Budget Responsibility to calculate Reeve’s headroom in 2029-30.

So what of this year’s gamut of planned tax rises? And how will they affect the economy? Precise effects are difficult to calculate but it is worth examining the short and long-run effects on two areas: economic growth and inflation.

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On inflation, Reeves has tacitly admitted that she made a mistake in her maiden budget by paying too little consideration to prices. This time, the government is celebrating keeping rail fares frozen and preventing prescription costs from rising to £10. More is to come in the budget as the chancellor has rightly focused on how to bring down bills. After years of governments telling us they can’t control inflation — saying that is the Bank’s job — it turns out they can have a big impact on it.

There are two main ways fiscal policy can be recruited in the fight against higher prices: the first is changing the structure of the UK’s administered price system which pushes up utility and other bills every April and October. Changes here have an impact on one-year inflation.

The second and more long-lasting effects are on changing the level of demand in the economy. This is why taxes matter. Both time spans are important for the Bank, which will be able to digest the budget measures before its last interest rate decision of the year on December 18.

Analysts at Deutsche Bank have gone through some expected budget measures and concluded that disinflation could be the big surprise of this year’s budget. So much so that they are calling it the “rabbit out of the hat” — the first Reeves has had a chance to deliver.

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The most trailed tax cut will be a reduction of about 5 per cent in the VAT applied to energy bills, to kick in at the start of the year. This would reduce annual consumer price inflation by 0.15 percentage points and the retail price index by 0.22 percentage points in 2026. The latter would also lower RPI-linked prices such as phone bills.

The same amount of disinflation would result from the government reducing green taxes in the Ofgem price cap — the equivalent of cutting household bills by £85, according to Deutsche Bank. Another 0.14 percentage points will be lopped off by a freeze in fuel duty, where Reeves could maintain the 5p cut and avoid raising pump prices by RPI. These three measures could cut short-run inflation, which is running at 3.6 per cent, by a sizeable 0.5 percentage points in 2026.

The government could go further and have a lasting impact on future bills by changing the indexation of rail fares and duties away from RPI — a flawed and expensive index — to CPI. The change would take another 0.5 percentage points off annual consumer prices next year.

Pushing in the opposite direction in favour of more, not less inflation, is the chosen “smorgasbord” of tax rises over a rise in the basic rate of income tax. The latter would have been an enduring disinflationary tax, which is why its rumours helped bring down gilt yields as investors bought up bonds in anticipation of another leg down in inflation. “An income-tax hike raising £10.9 billion in 2026/27 was crucial to delivering a persistently disinflationary budget,” Rob Wood, chief UK economist at Pantheon Macroeconomics, said.

Wood thinks Reeves is at risk of squandering the disinflationary gains by opting for a number of tax rises, targeting pensions, high-value homes, landlords and the gambling industry. Most of these tax rises are likely to be backloaded, raising the most revenues towards the end of the parliamentary term. If fiscal tightening is delayed, and the exact revenues from the tax measures are uncertain, the market is poised for disappointment.

Wood adds: “A more backloaded, shakier and less directly disinflationary budget reduces the need for the monetary policy committee to cut interest rates in 2026 and likely raises gilt risk premia. A prolonged market hangover will likely ensue from recent events, as political uncertainty over the prime minister’s and chancellor’s political positions continues. The budget now looks less disinflationary than priced in.”

Mehreen Khan is Economics Editor of The Times