Mr Monti has decided he can no longer survive as unelected Prime Minister of Italy, without a working majority in the Parliament. It was always an odd idea that an unelected “expert” could parachute into the job of Prime Minister without having taken the precaution of building a majority party and winning a General  Election first. Now it appears that MPs in the Italian Parliament are no longer willing to go along with what he wants to do.

             It will be interesting to see if the Italian General Election will bring to the fore important debates about the future of the Euro scheme and its impact on  the Italian economy. Will Italy vote for more of the same? Will they vote for remaining in the Euro and applying more of the austerity medicine that goes with the current version of the currency?  Will anyone campaign for withdrawal from the Euro? Will anyone say that the current budget and banking policies being followed within the Euro scheme are combining to throttle the Italian economy?

              The issue before the Italian electors is in essence a simple one. Will they continue to do whatever the EU demands, as the price of Euro membership? Are they happy with the current results of these policies, measured in many lost jobs and falling output?  Or do they think the current Euro sceheme is not working? Do they want Germany to contribute more by way of transfer payments? Do they want the ECB to print more money? Do they want cross guarantees to support all Italian banks? Should Germany inflate more to help correct the lack of competitiveness in the south?

              I suspect they will choose another government which signs up to the full Euro scheme for fear of worse. Now is their opportunity to have the debate they need to have over why the current Euro scheme is not working economically for them or the other southern states. Their current levels of youth unemployment are worryingly high. Many forecasters now expect another two years of Italian recession.

I attended a very interesting private meeting  recently on the Scottish Question. A couple of  learned Scots told us that Scottish nationalism was  defined by dislike of the English in general, and the dislike of English Tories in particular. Scottish nationalists do not like London making decisions for them. They like it even less if it is English Tories calling the shots there, instead of Scottish Labour MPs.

None of this is suprising. The success of the Scottish Nationalist party has been brought on by Labour’s anti Tory  campaigns for devolution. Their failure to secure enough votes for devolution in the 1970s, when Scotland was still reluctant to tread this path, led to a long sulk and a revitalised and successful attempt to put it through on return to office in 1997.  Labour consistently claimed that a Conservative “English” government of the UK should not govern Scotland. They saw nothing wrong with a Labour UK governing Northern Ireland with no Labour MPs, or governing England with a majority of Conservative MPs, but they did think a Conservative majority government at Westminster lacked authority to govern Scotland if the Conservatives had few seats for Scottish constituencies.

Labour’s dislike of the Tories, their insistence on using the legitimacy argument against the Conservatives, and their determination to polarise opinion on devolution, helped the SNP establish its position as a credible force in Scottish politics. The SNP had lively internal debates about whether it was a true independence movement, as the purists wanted, or a party of Scottish government seeking more devolved powers within the UK. Mr Salmond has often come across as  a devo max man rather than a true independence fighter. He after all wanted devo max on the ballot paper for the referendum.

The stated position of the current SNP is not to seek Scottish independence, but to seek a new kind of dependence, with some more things being settled by a devolved Scottish government. It is difficult to argue that a country is independent if it does not have its own currency and central Bank, yet Mr Salmond wants to stay with the pound and a monetary policy and interest rates fixed by the Bank of England. Mr Salmon also wants Scotland to be a member of the EU, with all that that implies for loss of sovereignty. The SNP wishes to share a Queen with England, rather than have a new Republic with a Scottish President.  The SNP are just better at devolved politics than Labour, and have used Labour’s anti Tory and anti Union rhetoric of past years to gain themselves devolved office. Now they wish to press for devo max, calling it Independence. In practice what they seek woukld  leave their new  Scotland  controlled financially by a monetary union where they  no longer have a seat at the Cabinet table or in the Central Bank, and leave Scotland under an avalanche of new EU controls without the current UK opt outs.

English nationalism is not defined by attitudes towards other parts of the United Kingdom. Indeed most English nationalists are relaxed about belonging to the union of the UK. Most accept that it is Scotland’s call whether to stay or go from the union. The defining characteristic of English nationalism is dislike of EU power, a sense of shame or anger that a once great free country is now bossed around by the institutions of Brussels. English nationalists are not allergic to the Scottish saltire, but to the twelve stars.

It is true that English nationalists now think the deal within the UK union is unfair on England. They want as much self government for England as Scotland enjoys for Scotland within the union of the UK. They want a fair financial settlement between the differing parts of the UK union. They either want English votes for English issues, or a new English Parliament.

All of this argument is second order compared to their overriding wish to be rid of EU interference in our law making, budgets and general government. A true Scottish nationalist wants for Christmas to be free of London control. A  true English nationalist wants to be free of Brussels. Eng,lish nationalists also want their country to be allowed to exist, instead of continually wiped from the Brussels version of the map. The aim of balkanising England into unloved regions has been defeated. Now we need to rebuild England.

          Coming to this blog for the festive season:

A modern fairy story,   “Dave, George and the magic lamp”

and the latest leaks from the heart of government, as we discover what Dame Lucy and Dr Roy are up to.

What else do readers want to hear about?

             We saw yesterday that the OBR forecasts a gently rising recovery from here. People’s real incomes will go up modestly, share and property prices will rise  a little, more people will get jobs.  The trouble is the OBR have been too optimstic before about this economy.  It would be wise for the government to take more action to try and ensure a faster recovery, and head off more bad news and downgrades like the ones we have experienced for the last two years.

              I want people to be better off. I extend that wish to people at all income levels.  Lower tax rates could help. So too could a faster rate of economic gr0wth, generating better returns for savers and higher incomes for those in work. Breaking up the state banks, writing off bad debts to speed the day when the banks have good enough balance sheets to lend more against decent projects, is central to making progress. A new generation of would be home buyers and entrepreneurs are being denied access to proper credit facilities thanks to past errors, weak bank balance sheets and now super prudent regulators who cannot resist getting the cycle wrong both ways.

             I do not wish to hit people on low incomes by being mean on benefits for those who need them. The government is right not to hit the pensioners and the disabled with increases in pensions and benefits below the level of price rises. I have no wish to cut important public services. I do, however, think the government is correct in saying it must get the deficit down, and make progress in limiting the build up of debt. The Opposition too agrees with this, though there are still rows over timing and extent.

            So how can you square the circle? The answer surely is to be generous to those in need, but to be firmer over eligibility for state help. Many of us wish to be generous to pensioners, so maybe as longevity rises so we have to make further increases in the age of retirement to help balance the books. A 60 or 65 year old today is on average fitter and likely to live considerably longer than the equivalent twenty years ago.

             We should speed the moves to control our borders better. We should not extend out of work benefits to people who recently arrived in the UK and are not UK citizens. If they come here under the free movement of workers they should not be entitled to out of work benefits for doing so. The availability  to  work test should be applied to ensure that those who can work do work when work is available.

               The introduction of a high cap for housing benefit in understandable, as the government does not wish to destabilise families living in dear to rent homes . There could be a much tighter cap for new claimants.

                The UK could have a couple of years off from meeting the 0.7% target for Overseas Aid whilst we are sorting out our large budget imbalance. There are still items in the Overseas Aid budget that do not represent value for money, or further the noble aims of relieving poverty and disease in the poorest countries. Mr Cameron could dig deeper over the excessive contributions  we currently make to the EU budgets. Why not tell them we do not wish to contribute to the EU regional aid and agricultural programmes? it would be cheaper to do our own.

              There is universal acclaim for more public capital spending. We need to remember that these are often growth projects, which then need revenue finance to keep them running once built. When trying to reduce public spending, you do need to limit new capital works. If we gain better control over our borders then we will cut the need for extra schools, hospitals and social housing, which will represent a substantial saving to the taxpayer.

              Let’s have lower more competitive tax rates, better working banks, and more realistic public spending. Then we could match or probably exceed the OBR’s forecasts for rising incomes and a more successful economy.  Some seasonal cheer is better than more gloom about austerity.

          The briefing that we are in for several more years of Austerity Britain was curious.  How does this square with the more optimistic forecasts from the Office of Budget Responsiblity, the official forecaster?

          The official forecasts do not think we are in for more years of austerity. “Whole economy earnings” grow at 2.6%, 2.2% and 3% in the three years up to the election.  Wages and  salaries rise by more than inflation this year and in 2014-15,  and go up by 2.5% in the middle year when prices are forecast to rise 2.6%.  In their graph the OBR shows real wages increasing   just above zero next year, rising to a 2% annual  gain by 2015. The OBR forecasts rising share prices throughout the period and small rises in property prices. There are too many people in the UK on low incomes, and have been for many years. At least the forecasts say more will have jobs and wages will start going up.

            Current public spending rises every year in cash terms, and public sector investment spending also rises next year and the year after. The OBR confirms that in the period Quarter 4 2011 to Quarter 3 2012 the public sector has grown overall in real terms, contributing 0.4% to total economy  growth, which came in at just 0.3%.  They forecast small real declines in public spending hereafter, but that of course depends on how inflation turns out.  With a pay freeze in place, if it were effective, the cash rises in spending should allow some growth in service provided.

           The OBR forecasts 1.2% growth next year, 2% in 2014, 2.3% in 2015, and higher rates in the following two years. All this could better be described as “gently recovering Britain” rather than “Austerity Britain”. The number of jobs has outperformed their past forecasts by a wide margin, which is the one bit of good news.

           The issue, however, is will these latest OBR forecasts be any more accurate than the ones they issued two years ago?  Now they have slashed the 5 year growth figure from 13.2% for 2010-15, to under 6%, maybe they have cut it by enough. They do, however, still offer us the same profile of growth as before, with the fastest growth forecast for the latest years of the forecast. As the OBR say in their document  “A key risk is that potential output turns out to be lower at the end of the forecast period than we currently assume”.

            Indeed. The OBR’s gently recovering Britain could become  Austerity Britain again, if inflation is not controlled, and or if output does not expand as planned. We need more growth and faster growth. The aim should be to help many more people enjoy rising and higher living standards.

           I will look tomorrow at options to accelerate growth more, to make it less likely we have another disappointment.

The politics of the Autumn Statement once again are about fairness. The Coalition points out that under their plans the top 1% of earners will pay a quarter of all the income tax, and the top 5% of earners will pay 45%, more than twice their share of the income earned. The Coalition has raised taxes on the rich by more than taxes on other income groups. Labour says this is not enough, the richer people should pay more.

The Coalition counters by pointing out that the higher rate of Income Tax aimed at the top earners has so far caused (or coincided for those of you who still deny Laffer) with them paying much less total tax, a blow to a Treasury in need of more income to pay all its bills.

The Autumn Statement also reveals that since 2007 average earnings for those in work has risen by 20% (in cash terms – not real) whilst benefits for those out of work has risen by 24%. The Coalition as a result wishes to limit future rises in out of work benefits to 1%, likely to be below inflation. Labour is not sure it will support this, and asks to see the small print as to how many benefits are affected and if some of them are paid to people in work.

The best way to get the benefits bill down is to get many more people back into work. The UK state is still spending too much. Economic success will produce a more affordable state, and a more affordable state is necessary for economic success.

The latest forecast for the UK economy thinks there will be growth of around 6% for this Parliament, compared to the 13.2% the OBR forecast in June 2010. They attribute the worse performance largely to the weakness of the European economies, and slower growth world wide.

As a result of the slow down, they now forecast tax revenues some £50bn a year lower in 2014-15 than their June 2010 forecast. I have long argued that the forecast big surge in revenues looked problematic, especially given the higher rates. The Chancellor confirmed with some arresting figures in his Statement that the 50p tax band has cost the Revenue £7bn of tax income, as rich people have gone elsewhere to earn.

Total additional borrowing for the five years now comes out at £565 bn, not such a bad figure as feared. It is lower thanks to the large savings on interest payments, now amounting to savings of over £30 billion over the planned period. This compares with original forecasts of £451 billion extra borrowing this Parliament in the June 2010 figures. The extra borrowing has been brought on by loss of revenue. The higher spending forecast in 2010 is staying close to the original budgets.

Future growth rates depends crucially on changes in credit and money in the private sector over the next year or so, and over demand levels which will be affected by inflation. The future growth rate will be strongly influenced by progress in mending or bypassing the commercial banks. I will keep you posted of progress.

The best boost the Chancellor could give to the UK economy would be cheaper energy.

Uk energy is too dear for much of industry. As a result more goods are made abroad where it is cheaper, rather than here. More energy intensive industry is contemplating closing plants, or putting its new investment elsewhere. The government says it wants more manufacturing in the UK. It needs cheaper energy to encourage it.

UK energy is also too dear for consumers. As we experience a succession of cold winters, people need some relief from dear energy so they can keep warm at home and still have some money left over for discretionary spending. Cheaper energy would provide a boost to spending and therefore to jobs. It would come as welcome relief especially to people on lower incomes who see too much of their money gobbled up by energy bills.

The Chancellor needs to persuade the Energy secretary, Mr Davey. We want more exploitation of the UK’s gas and oil reserves. It will take more gas fired power stations. It means allowing shale gas recovery. it means a tax regime for our energy reserves that promotes more production.

Maybe Mr Osborne is now able and willing to do this. He should say “Drill Davey, drill”.

As politicians and some in the media work the country into a frenzy against tax dodgers, please spare a thought for all those politicians and commentators arguing for more tax breaks to promote good works, more gr0wth and healthy lifestyles. One man’s tax dodger is another man’s prudent individual taking advantage of strongly recommended tax breaks which have been carefully honed by government.

Some people pay less tax because they give generously to charity, some because they are making accelerated savings for retirement so they will not depend on benefits and taxpayers in their old age, some because they are investing in places and causes approved by politicians, some because they are lending their money to the government to spend on public services. Most people take action to avoid tax. If you have to drive into central London, if you do so before 7 am you avoid the Congestion Charge. I do not have a tv in my London flat in order to avoid having to pay a second BBC licence fee. If you do not smoke or drink spirits you avoid large amounts of tax on alcohol and tobacco. If you do not move home in recent years, you avoided the large Stamp duties now imposed. Tax is taxing. Tax has a direct and visible impact on what you can and cannot do. Tax is often designed to stop you doing things. In other words many taxes are designed to encourage you to avoid them.

The UK’s problem is not that we pay too little tax. It is that the country produces too little for its ambitious plans for public spending. We need to produce more to make our current level of spending affordable. The problem is our current level of tax gets in the way of growing the economy faster. As a country moves to taxing too much, as the UK is doing, so governments have to find more and more ways of getting more and more money out of the same people and companies . There is always the danger that more tax will put people off earning so much, or drive them to live or work in another country.

In the UK the motorist is one of the favoured groups to pillory. Many politicians make motorists out to be some kind of special group of planet wreckers and anti social people to start with. Out of taxed income a motorist now has to pay tax to buy a car, tax to keep the car on the road, special taxes to drive in London or over certain bridges in the national network, tax on the fuel in the vehicle, and car park charges in state owned car parks and to park on the state provided highway which he or she has already paid for.

If the government wants to stop people avoiding tax there is an easy answer. They should legislate for simple flat taxes, and abolish all allowances and tax breaks. Out should go the exemptions for charity, for pensions saving, for prime residences, for certain kinds of investment, for National Savings and all the rest. In should come lower tax rates that apply to us all however we choose to spend our money.

I doubt the government would want to do this, as each tax break is defended by armies of supporters and media commentators. In which case, isn’t there a danger in all these witch hunts against people who are just good at using the large number of legal loopholes and taxbreaks to pay less tax?