The Impact of Austerity Measures: Houston we have a problem!

Houston we have a problem!

Banks should brace themselves to withstand the “extraordinary serious and threatening” economic situation said Sir Mervyn King the Governor of the Bank of England. He also said the Bank itself was making “contingency plans” in case of a Eurozone break up.

This is an extraordinary and totally unprecedented statement from the Bank of England and tantamount to saying “assume crash positions”.

Last week the six central banks including the Bank of England took action to encourage lending between bank. Basically lending between banks had stopped in the last six months, and while clearly the six banks are taking sensible and timely action, it is a sign of panic that they have had to take this action. While Sir Mervyn has said he believes UK banks can weather the storm, and advised raising further capital, the problems associated with this economic crisis are he believes well beyond the control of the UK Government alone.

His comments came days before Italian minister Elsa Fornero broke down in tears as she tried to explain the impact of austerity measures on Sunday. In Italy taxes and the pension age are rising. It was not only the Italians who were working on a Sunday. Irish Prime Minister Enda Kelly also went on television to warn that Ireland must prepare for a tough budget this week. Public spending is to be cut by 2.2bn Euro’s and taxes increased by 1.5bn Euros.

Despite the universally gloomy headlines predicting yet more pain there are many in the UK who I believe have not understood just how bad the economies of the developed world are faring. If we are lucky we face a decade of flat growth and declining living standards. Sir Mervyn like those on Apollo 13 is fully aware of the severity of the issue and warning that whilst he is still hopeful our luck might just run out.

When money gets tight people naturally look to cut discretionary spending. Starting on 1 October 2012, UK employers will be required to automatically enrol staff into pension schemes, either their own or the newly created National Employment Savings Trust. It is sadly inevitable that many employers will seek to pay the minimum that is necessary to meet their legal obligations and that many employees will opt-out of scheme membership. A genuine attempt, which has taken many years to get off the ground, to provide a sustainable pension scheme for millions of workers is going to struggle to survive. I am genuinely hoping that as with Apollo 13 there is a happy ending.