BRITAIN’S Prime Minister David Cameron warned earlier this week that Britain’s debt crisis is so bad that 10p in every pound raised in tax will soon be meeting interest payments alone.

In a major speech on the economy, the prime minister accused Labour of ‘reckless’ spending and said the public sector had to be brought “back into line”.

The national debt is forecast to reach an eye-watering £1.4 trillion.

If drastic cuts were not implemented, the Treasury would be spending an annual £70 billion on debt interest within five years — more than on schools in England, transport, and fighting climate change put together.

That means for every single pound of tax, 10p would be spent on interest. Cameron cautioned that the ‘inevitably painful’ cuts programme could be felt for decades, such is the scale of the debt crisis facing Britain.

But as Cameron prepared to swing the axe, markets tumbled over renewed concerns over Europe and fears for global economic recovery.

In a fresh warning to the coalition about the fragile state of Europe’s recovery from recession, the FTSE 100 Index was down more than 1.6 per cent following falls of nearly four per cent in Asia.

Although Cameron stressed that the UK’s position was better than that of Greece, which has been left in financial and social turmoil in the wake of the credit crunch, he warned markets are no longer focusing simply on the financial position of the banks.

“They want to know that the governments that have supported the banks over the last 18 months are taking the actions to bring their own finances under control. Around the world people and their governments are waking up to the dangers of not dealing with their debts. And Britain must be part of that international mainstream”, he said.

Speaking alongside new Treasury Chief Secretary Danny Alexander, Cameron told an audience in Milton Keynes that now the Tory-Liberal Democrat coalition had been given access to the books, it was clear that the “overall scale of the problem is even worse than we thought”.

“How we deal with these things will affect our economy, our society — indeed our whole way of life,” he said.

‘The decisions we make will affect every single person in our country. And the effects of those decisions will stay with us for years, perhaps decades, to come.

“It is precisely because these decisions are so momentous, because they will have such enormous implications, and because we cannot afford either to duck them or to get them wrong that I want to make sure we go about the urgent task of cutting our deficit in a way that is open, responsible and fair,” he said.

Cameron went on: “Based on the calculations of the last government, in five years’ time the interest we are paying on our debt is predicted to be around £70 billion. That is a simply staggering amount…

‘Today we spend more on debt interest than we do on running schools in England. But £70 billion means spending more on debt interest than we currently do on running schools in England plus climate change plus transport.

“Interest payments of £70 billion mean that for every single pound you pay in tax, 10 pence would be spent on interest.”

Cameron’s tone is in marked contrast to that of Nick Clegg, who suggested there would be no return to the ‘harshness’ of spending restraint under Margaret Thatcher, although she never actually cut overall levels of public spending.

The Lib Dem deputy prime minister promised instead that the coalition would deliver what he called ‘progressive’ cuts, with protection for the poorest areas of the country.

“Fiscal retrenchment does not mean a repeat of the 1980s,’ Clegg said. ‘We are going to do this differently.”

Sentiment was hit further by mounting worries that Europe’s debt problems could spread after Hungarian officials signalled last Friday that the nation was at risk of a Greek-style fiscal crisis.

The euro hit fresh four-year lows against the dollar over the weekend — at 1.188 dollars — before recovering slightly.

The Treasury is looking to Canada — which successfully slashed its 9.1 per cent budget deficit to zero over three years in the 1990s — for inspiration.

Sources say Chancellor George Osborne will follow Canada’s example by creating a ‘star chamber’ of senior ministers and officials, to which each member of the Cabinet will have to justify spending plans. Economists fear many government departments face budget cuts of 25 per cent, the steepest since the Second World War.

Benefit freezes, further cuts in child tax credits, privatisations and below-inflation pay rises for public sector workers are all expected.

An emergency Budget on June 22 will make the first inroads into the £156 billion budget deficit left behind by Labour.

Treasury sources say the spending review will go further than previous ones by attempting a “fundamental re-evaluation of the role of government”.

“This is not just a simple budget-setting exercise,” said one. “There’s a once-in-a-generation chance to examine what services the government should provide and whether there are ways to do it more efficiently involving the private and voluntary sectors.”

Former BP chief Lord Browne, a close friend and controversial ally of Tony Blair, is expected to become a Whitehall ‘super-director’ who will be asked to oversee ruthless cost-cutting measures.

Other industry figures believed to have been invited to help bring business-style efficiency to government departments include Sir Christopher Gent, chairman of GlaxoSmithKline, and Richard Baker, chairman of Virgin Active.

Cameron and Osborne believe the crisis in the public finances will prove even worse than first thought, since Labour’s Budget numbers were built around wildly optimistic growth forecasts.

It is anticipated there will be a shortfall in public finances of around £24 billion a year by 2013 — equivalent to a 6p increase in the basic rate of income tax.

The International Monetary Fund warned that 30 million jobs could be lost worldwide through the drive to bring down debt levels.

IMF boss Dominic Strauss-Kahn told a G20 summit of finance ministers cuts ‘will have negative effects on growth in every country’. He went on: “This is not just a European problem — it’s a global problem.”

However Strauss-Kahn praised the ‘determined action’ taken by Britain, Greece, Spain and Portugal to repair their finances.

University places are set to be cut further as Business Secretary Vince Cable signalled he would ditch Labour’s target of putting 50 per cent of school-leavers through university in a bid to shave £6.2 billion from the public finances.

He said he wanted to banish the ‘bureaucracy and frankly the snobbery around further education’ and concentrate more on lifelong learning and vocational training.

Cable has found £200 million from his own department’s budget to fund further education colleges and 50,000 more apprenticeships.