A former adviser to the Thatcher government has warned that official action to tackle tax avoidance and fraud is "a drop in the ocean" in light of the amount of tax revenue lost to the Treasury, which he believes to be almost £120bn a year – almost twice the amount estimated by Revenue and Customs.

John Christensen, former economic adviser to the UK and Jersey governments, who has also worked within the tax haven industry in the past, said government plans announced yesterday at the Lib Dem conference in Liverpool to raise an extra £7bn by 2014-15 by tackling tax avoidance and frauds were "too timid".

He criticised Britain's "permissive" tax laws, which he said placed Britain in the unenviable position of leading the world on tax evasion, with over half of all tax havens around the world being British, he said.

Christensen, part of the non-partisan Tax Justice Network, said the government needed to reverse the job cuts in HM Revenue & Customs – which unions say have numbered 30,000 over the past five years, to allow tax collectors to claw back the billions of uncollected revenue.

He told a fringe meeting at the Liberal Democrat conference in Liverpool organised by the Public and Commercial Services Union (but not listed in the conference guide), that tax avoidance by the wealthy who pay accountants to identify loopholes had become "too respectable".

Those who shunned paying their dues to the nation's coffers ought to be named and shamed in the same way as those convicted of benefit fraud, he said.

"HMRC are doing deals and settling out of court with people who have been avoiding tax for many years," he said. "There is a fundamental injustice here."

Christensen said that the government needed to apply an "anti-tax-avoidance principle" and crack down on slack tax laws.

He cited one mechanism that allowed large companies and supermarket chains to avoid VAT on items worth £18.50 or less by shipping products such as DVDs and CDs to Guernsey and Jersey before posting them back to the UK for sale.

Christensen said the "anti-competitive" loophole, put in place as a special arrangement in the 1960s to stop flowers being shipped to the UK perishing during delays at customs, was benefiting the "big players" at the expense of small businesses.

A Lib Dem MP who attended the meeting and backed the coalition's budget deficit reduction programme described the loophole as "mad".

John Hemming, who represents Birmingham Yardley, said he had no idea this loophole existed and agreed the government "should not allow that to happen".

Danny Alexander, the Lib Dem chief secretary to the Treasury, yesterday promised to clamp down on wealthy individuals and business who thought paying extra tax was an optional extra.

Much of the plan will involve more intensive scrutiny of those liable to pay the new 50p tax band introduced by the Labour government. Revenue and Customs looks at 5,000 high net-worth individuals, but will expand that number to 150,000.

He also promised a more robust criminal deterrent against tax evasion by increasing the number of criminal prosecutions by Revenue and Customs fivefold. Alexander revealed the Treasury would strengthen a team of investigators to catch those hiding money offshore.

The plans will be funded by a ringfenced investment of £900m, which will cover the spending round and is separate from any final deal imposed on Revenue and Customs in the spending review due on 20 October.

The Treasury estimates evasion costs £7bn a year in uncollected tax revenues, while avoidance costs roughly the same. Attacks on the tax system by organised criminals are estimated to cost around £5bn.

Alexander also promised to contract out up to £1bn of tax debt per year to private sector debt collection agencies.

But Christensen claimed the true scale was far higher, citing annual figures of £26bn in uncollected revenue, £25bn lost annually through tax avoidance, and a further a further £70bn in tax a by large companies and wealthy individuals.

Thousands of jobs had been cut by HM Revenue and Customs in recent years and thousands of local tax offices closed, making it more difficult to collect taxes, he said.

Christensen said the government should reverse the job cuts and follow Denmark's example, who added 500 additional staff to target tax avoidance rather than £900m to bring staff to investigate the problem on a short-term basis.

Mark Serwotka, the general secretary of the Public and Commercial Services (PCS) union, said Alexander's announcement was a "small step" in the right direction.

The PCS has spearheaded the call to target the billions of pounds of uncollected taxes by people who were avoiding or deliberately evading paying their fair share, instead of targeting public services for cuts.

He is lobbying for a reversal of staffing cuts in Revenue and Customs, which have seen around 30,000 jobs cut in the past five years; more are expected following the spending review.

Serwotka warned the fringe meeting that taking the axe to public services had not been part of the Lib Dem general election manifesto.

Millions of people voted for the party's progressive policies, not to see it go along with slashing spending on essential public services, he said.

The union leader warned that the coming months would be "dire" if George Osborne, the chancellor, confirmed billions of pounds of cuts in next month's comprehensive spending review.

He said the prospect of a cull of hundreds and thousands of job losses in the public sector and in private firms would lead to spiralling unemployment and threaten a double dip recession.

"We intend to step up our political campaign, but if this is dismissed we will see a lot of industrial strife the length and breadth of the country, the like of which we have not seen for decades," Serwotka said.