Valued services will be cut, says Cameron

Britain is 'like a business on its knees' warns Prime Minister as he says benefits fraud outranks all other areas of 'ingrained waste'

Services which the public "genuinely value" will fall victim to the coalition's spending cuts, David Cameron said last night as he warned he could not place "a ring of steel around every service and every job".

The Prime Minister stressed that the Government must "face up to" the scale of the task, likening the state of the nation's finances to those of a business on its knees. "When a company is failing – when spending is rising, sales are falling and debt is mounting – you need someone to come in with energy, ideas and vision and take a series of logical steps," he said.

Mr Cameron has spent the past seven days taking his tough-love message to town-hall meetings across the country, insisting that the "legacy" left by Labour makes the difficult decisions unavoidable. With only health and overseas aid escaping the cuts, while education and defence will be spared the worst, some departments were ordered to draw up plans for 40 per cent budget cuts. At least one Cabinet minister is understood to have angered the Treasury by failing to reach the swingeing target.

"Even with reform, the truth is there will be some things that we genuinely value that will have to go because of the legacy we have been left. I don't like that any more than anyone else, but this is the reality of the situation we're in and it's the duty of this government to face up to it," Mr Cameron said in an article in The Sunday Times.

From this week, members of the public will be able to rate ideas submitted to the Treasury's Spending Challenge on ways to save public money. Speaking at a PM Direct event last week, Mr Cameron highlighted ideas including volunteer "civic gardeners" replacing council staff, civil servants signing up to high street mobile phone deals, and reducing the reliance on expensive IT software.

But the Prime Minister ran into trouble when he suggested council-house tenancies should be limited to a fixed term and not granted "for life". Mr Cameron predicted a "big argument" over the idea, and promptly got one. Lib Dem deputy leader Simon Hughes insisted it was not coalition policy – and never would be – while Tory backbencher Nadine Dorries said yesterday: "The bedrock of families is the family home and I do not think that saying to people 'in five years' time you might lose your home' is a good way for people to try to improve their lot."

However, Mr Cameron refused to shy away from controversial areas of spending. He signalled his personal backing for welfare reforms being drawn up by Iain Duncan Smith, the Secretary of State for Work and Pensions. The PM said that the £5.2bn annual cost of fraud and error was "the one area of ingrained waste that outranks all others".

"Many see it as a fact of British life that we have no hope of defeating. I passionately disagree. Simply shrugging our shoulders at benefit fraud is a luxury we can no longer afford."

Vince Cable, the Secretary of State for Business, Innovation and Skills, laid out his "red lines" which the Tories must not cross if the coalition is to hold together.

In an interview with The Sunday Telegraph, Mr Cable said he had to see "evidence of fairness and redistribution" during the planned five-year term. He wants "a tax system that means people at the bottom end of the scale pay less and at the top end of the scale pay more".