The Treasury is making contingency plans for the breakup of the euro and an "Armageddon" scenario, Vince Cable has said.

But the business secretary argued that Italy was basically solvent and the pessimism and panic gripping the markets was overdone.

He said: "We have a plan … there's a lot of scenario planning, thinking about all possible outcomes. We have to deal with the world as it is."

Discussing Italy, he said the country was not in the same league as Greece.

"It's not actually got a very big deficit on its budget, its economy is basically strong – the north of Italy is very strong, an export-based economy. A few basic things right and this problem should be dealt with.

"I don't think we should be panicking, and although the situation is very difficult, and we're inevitable affected by it, I think the extreme pessimism and gloom really isn't justified in this case."

He insisted Britain was better placed than the eurozone. "We have political stability, we have financial stability. What we don't have yet is sustained growth," he said.

The business secretary set out the government's plans for improving growth, and how it might cope with a European recession but he said there was "absolutely no reason" why a doomsday scenario should come to pass.

"Certainly it affects our trade and potentially, in this Armageddon narrative, it affects the banking system, but we're not there yet … we have a very clear commitment to stabilising our own country's finances, and for shifting the base of the economy and its investments into manufacturing.

He also insisted there was no plan for tax cuts or big extra spending in the forthcoming autumn statement.

"It's difficult to make tax cuts in an environment where we're trying to get budget discipline back … The chancellor is looking at all options. I'm not ruling anything out."

Cable again set himself against plans to make it easier to fire staff as proposed in the Beecroft report, arguing to do so would be undermine consumer confidence at a time when it needs strengthening.

"I don't think we want to create an environment where millions of people are worried about their own jobs … But there are some very good suggestions, some practical ideas [in the report] … We've got to look at the technical proposals and look at evidence."