Soaring levels of crime are costing Britain’s economy as much as £250bn a year, according to a report that blames austerity for a breakdown in policing and criminal justice.

The report by the centre-right thinktank Policy Exchange, backed by the former Conservative chancellor and home secretary Sajid Javid, said that years of cuts to funding for the police, prisons and courts had contributed to a dramatic rise in crime which was holding back the economy.

The report said an “epidemic” of shoplifting, alongside other crimes, was hitting businesses, the public sector and individuals hard, with a direct cost to the economy of about £170bn a year, or about 6.5% of gross domestic product (GDP).

In addition, it estimated there were intangible effects on behaviour derived from a fear of crime. Although this is difficult to quantify, it warned that actions being taken by businesses and individuals to avoid being a victim of crime – such as not visiting the high street, or deferring investment – could take the total cost to as much as £250bn, or 10% of GDP.

With the government under pressure to find money for public services and defence spending, Policy Exchange said Labour needed to invest an additional £5bn a year into tackling a crisis in prison capacity, the size of the policing workforce and clearing backlogs in the courts.

Alongside highlighting austerity, the thinktank recommended reforms to sentencing, including automatic tougher sentences for prolific offenders and deportation of foreign offenders.

The report, which was also backed by the former Bank of England chief economist Andy Haldane, urged the government to increase public spending on policing and the criminal justice system to help underpin the economy.

Official figures show a steady increase in levels of crime over recent years, while Britain’s largest retailers have warned of a rise in shoplifting with huge costs for the industry. Last year, Sharon White, the former chair of the John Lewis Partnership, described the increase as an “epidemic”.

Police-recorded shoplifting has increased by 51% relative to 2015 and is at its highest level in 20 years. Police-recorded robberies and knife crime offences are up 64% and 89% respectively over the same period.

Javid, who was home secretary between 2018 and 2019, before briefly serving as chancellor until early 2020, wrote in the foreword to the report that he was proud of his record in government for tackling crime, but added: “that said, there’s clearly more to do.”

“History teaches us that economic activity flourishes in societies that value law and order. When consumers and businesses know that contracts will be honoured, and that the fruits of their labour will be protected from theft and the threat of violence, they have the confidence to work, to earn and to build something of value. Without this confidence we all suffer.”

Labour has sought to crack down on crime, with Keir Starmer having said in opposition years of cuts to police funding and changes to sentencing rules were a “Tory shoplifter’s charter” for the rise in crime rates across the UK.

However, there are concerns that a tight position in the public finances and the government pushing to increase defence spending could lead to funding restraint for public services in chancellor Rachel Reeves’s spring spending review later this month.

Policy Exchange said it recommended cuts to other areas of public spending, while suggesting that defence funding must take priority. This however would complicate Labour’s promises not to return to austerity, as well as campaign pledges to fix battered public services.

Haldane, who is now the chief executive of the Royal Society of Arts, said: “We are approaching what will almost certainly be a brutal, and what could be an electorally defining, public spending review.

“In an era of acute anxiety, this report is an arresting clarion – and wake-up – call to all political parties on the true and rising economic costs of crime and the societal consequences of continuing malign neglect of that most foundational of government responsibilities – the security of citizens.”

Diana Johnson, the minister for crime and policing, said: “In the next decade, this government plans to halve violence against women and girls and knife crime, and restore public confidence in policing and the criminal justice system, as part of the Safer Streets Mission.

“Through the Plan for Change, we will also bring visible policing back to communities, with 13,000 extra neighbourhood police officers, PCSOs and specials. Alongside this, the government will build 14,000 more prison places by 2031 to lock up dangerous offenders.”