THE COMING public spending squeeze could cut Britain’s annual growth by up to two percentage points, a report warns today.<br /><br />With the government finances in the worst shape for at least half a century and public debt heading towards 100 per cent of gross domestic product, major spending cuts which will have profound effects on the economy are on the cards, says economist Roger Bootle in the latest issue of the Deloitte Economic Review.<br /><br />Bootle, who is managing director of Capital Economics, says measures announced by Alistair Darling in the April budget “did not go nearly far enough”. He estimates that further fiscal tightening worth some £70bn will be needed over the next five years, and “possibly much more”.<br /><br />Real government spending, adjusted for inflation, may need to fall by an average of two per cent a year for the next five years. Given unavoidable increases in some spending areas like debt interest and social security, departmental budgets could see their biggest squeeze ever.<br /><br />Spending cuts could knock over one per cent off annual economic growth compared to that seen in recent years. But deep cuts in public sector employment and wage growth will also depress household incomes and spending. This means the overall impact on GDP could be to cut growth by two per cent, Bootle says.<br /><br />Consumer-related companies, like retailers, will be hardest hit, while sharp cut-backs in public investment also bodes ill for the transport and construction sectors, he predicts. By contrast, exporters should benefit from the lower pound.<br /><br />Bootle says the drastic action needed to sort out the fiscal position presents authorities with a once-in-a-generation opportunity to remodel the UK economy and to reduce its dependence on the state. <br /><br />But “the great squeeze is going to hurt,” he concludes.