The National Health Service will crash within two years with catastrophic consequences unless the government orders an immediate multibillion pound cash injection, the former minister in charge of care services says.

The stark assessment from Norman Lamb, minister of state at the Department of Health until May’s general election, comes as fears mount among senior NHS officials, care providers and local authorities that NHS and care services are approaching breaking point.

In an interview with the Observer, Lamb, a Liberal Democrat who was at the heart of policymaking during the Tory-Lib Dem coalition, accuses the government of dishonesty in failing to admit the scale of the problems.

He says that an increasing number of private companies and other organisations contracted to provide care by local authorities are refusing to tender again because cash-starved councils, already hit by budget cuts of more than 40% since 2010, cannot pay enough to let them run adequate services. Lamb says the result is that more elderly people in particular will end up in already overstretched hospitals, compounding the crisis.

Pre-election promises by the Tories to provide an additional £8bn for the health service by 2020, on top of £2bn extra pledged at the end of last year, are insufficient and too vague to reassure anyone, he argues.

“If the investment is not made upfront and in the early period of this parliament, you could see serious failures in the system,” he said. “The system will crash. Elderly people won’t get the care they need, and it will be people with mental ill health who suffer most, because that is where the squeeze always comes.”

While the promised extra money would help, it was nowhere near enough. “I don’t think anyone in the NHS believes that is enough. The government talks very vaguely about an extra £8bn by 2020, but it is needed now. If it comes in 2019-20, the system will have crashed by then. I think the next two years will make or break the NHS and the care system.”

The body representing more than 2,200 organisations providing home-based care, the United Kingdom Home Care Association (UKHCA), said that many of the biggest providers were considering handing back as much as half of their local authority business.

Lamb added that a two-tier system was in danger of developing: “The reason those companies are not going to tender any more is that they can make good money out of the private market, so we will have a complete divide between people with money who will get good care and those who have rushed visits, dreadful turnover of staff and poor care or nothing. That is the reality.”

In a speech to the Lib Dem conference in Bournemouth on Tuesday, Lamb will call for the future of the NHS, social and mental health care, to be addressed by a non-partisan commission, and says he is open to radical ideas on future funding, including a possible NHS tax, or a rise in national insurance contributions to fund extra spending.

Richard Humphries, assistant director, policy, at the King’s Fund, wrote on Friday on the organisation’s website: “56% of directors of adult social care report that providers are facing financial difficulties now. Three of the country’s top five home care providers are planning to pull out of publicly funded home care or have already done so; many more have handed uneconomic contracts back to local authorities.”

A UKHCA spokesman said: “The sustained pressure on prices by cash-strapped local councils, combined with the additional costs of the national living wage [to be introduced at £7.20 from April], carries serious consequences. We have already heard from large providers contemplating handing back up to half of their local authority business unless rates paid increase before next April.”

NHS England says the service faces a £30bn annual shortfall by 2021 unless radical changes are made in how healthcare is provided, with more emphasis on keeping people out of hospital through high care at home and in the community.

Sir David Nicholson, NHS chief executive until April 2014, said Lamb was overstating the extent of the problems, while accepting that the situation was serious: “On Norman’s warning of a crash I don’t buy it, and while you will undoubtedly get parts of the country in distress I would describe the approach as ‘managed decline’. It’s worth pointing out though that even with the £8bn front loaded it only takes the NHS to the 2005 [level of funding relative to GDP] position.”

Dr Mark Porter, chair of the British Medical Association said: “We need policymakers to be honest with the public and start working with patients and healthcare professionals on a long-term plan.”

Hunt and NHS England chief executive Simon Stevens have recently revealed key differences of opinion over exactly how much extra money the service needs. Since the election Hunt has insisted that the £8bn is enough, and publicly demanded rapid progress on delivering the matching £22bn of efficiency savings Stevens has promised.

However, this month he used NHS England’s annual conference to highlight that the £8bn depended on two things – improved social care provision and progress in tackling public health problems – neither of which experts say has happened.

Questioned by the Commons health select committee last week, Hunt admitted that a further deterioration in social care services would intensify the pressures on the NHS. Stevens and senior colleagues believe the gap in NHS finances will become even wider than £30bn unless the decline in social care help for older people and the disabled is arrested. Hunt hinted that November’s comprehensive spending review might bring some extra resources for it.

A Department of Health spokesperson said: “We are investing the additional £8bn that the NHS itself has said it needs to implement its own plan for the future. The NHS must deliver its side of the plan by implementing cost-control initiatives the government has brought forward, like clamping down on staffing agencies and expensive management consultants.

“We’re already bringing the NHS and councils together, which is helping people to live independently at home and saving money in the long term.”