David Cameron came under attack from civil liberties groups today as he outlined radical plans to hire “bounty hunters” to tackle benefit fraudsters.

The Prime Minister said credit agencies would be part of an “uncompromising” crackdown on welfare cheats who steal more than £1.5 billion a year from the state.

Under the plans, outlined at Mr Cameron’s latest PM Direct event, private firms will get a “bounty” payment from the Department for Work and Pensions for every cheat they identify.

Full credit checks will be carried out on all new benefit applicants as well as existing claimants suspected of fraud.

The reforms will also include tougher penalties, more prosecutions, measures to encourage others to shop cheats and greater efforts to recover “stolen” payments.

Alex Deane, director of Big Brother Watch, said: “Nobody approves of benefit cheats. But mining private data on a routine basis on the off-chance of catching people out is a disproportionate invasion of privacy.

“Furthermore, there should be a line between the state and the private sector. Taking powers of legal investigation and enforcement and granting them to private organisations blurs that line.”

Phil Booth, national co-ordinator of NO2ID, which campaigns against the “database state”, denounced the use of credit agencies as a “recipe for snooping”. He added: “This is a very significant blanket intrusion into private financial information.”

Some Liberal Democrat MPs are also worried about the plans, particularly as their leader Nick Clegg has promised the new Government will “stand up against illegitimate advances of the state”.

The Department for Work and Pensions insisted companies used would be covered by the Data Protection Act and all checks would be legal.

Welfare minister Chris Grayling denied civil liberties would be infringed and said it was “right and proper” to try to save taxpayers’ money. He defended the use of credit rating agencies, telling BBC Radio 4’s Today programme: “Why should the Government not use the same tools available to independent organisations?

“This is data that is publicly available, that is publicly on sale, that is available to set out spending patterns, what loans you have taken out. If there is a huge mismatch between the way you are living your life and the amount of money you are supposed to be receiving from the state in benefits, surely it is right and proper that we should be saying, How is that happening?’”

Shadow welfare reform minister Jim Knight said: “It’s right that this should remain a priority. But David Cameron must not use this as a distraction from the fact that his Government’s policies will increase the numbers of people who are unemployed and dependent on benefits.”