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David Cameron has promised there will be "light at the end of the tunnel" for the British economy following the government's cuts programme.

The prime minister told the ´óÏó´«Ã½ the country had the potential to be the "great success story of the decade".

He and deputy Nick Clegg have written to cabinet colleagues to remind them that reducing the deficit is the "most urgent issue facing Britain".

Ministers are negotiating with the Treasury over the size of cuts.

The discussions come amid tensions over defence spending and welfare reform.

In a phone-in session on ´óÏó´«Ã½ WM, Mr Cameron defended the cuts programme, saying: "We have got to demonstrate there's a light at the end of the tunnel. There will be a stronger, better, well-balanced British economy.

"I want Britain to be a great success story of this decade. People need to know there's a prize at the end of this, which is a successful decade for Britain, which is what I'm trying to deliver."

Afterwards, at a PM Direct question-and-answer session with the public, he stressed that cuts would only be made where they were "really necessary" and he wanted to avoid a situation where "if we get to the end of it we say 'that was a stupid cut, we have now got restore what we have cut out'".

He said that Gordon Brown or another Labour leader would have been taking the same action to tackle the budget deficit.

But he said he was "glad" he was in a coalition with the Lib Dems "because we have got to carry people with us".

He insisted the economy would emerge stronger at the end of the process, and vowed to "make sure we never get in this sort of mess again, of living beyond our means".

Whitehall departments have been told to present plans for savings of up to 40%.

Mr Cameron and Mr Clegg's letter reminds ministers that deficit reduction is the most urgent issue facing the country - and those who come up with proposals which will save money but promote economic growth in the long term are likely to be looked upon more favourably.

Welfare reform, greater support for children and investment in infrastructure are also mentioned as government "priorities".

In the letter, Mr Cameron and Mr Clegg thanked cabinet colleagues for their commitment during an "intense and at times tough" first 12 weeks of the coalition.

They said there would be a "radical redistribution of power from government to communities and people, to reverse decades of over-centralisation".

"The importance of this approach cannot be overstated. It underpins our attitude to public service reform. It animates our plans for genuine localism," they wrote.

"It explains our focus on government transparency. If we are true to this purpose then the people of this country will feel a new sense of power and responsibility in their daily lives."

The pair said the government "unlike previous governments, will govern for the long term".

They added: "This approach not only underpins our commitment to safeguarding our environment for future generations and to restoring transparency and accountability to our politics; it must also underpin everything we do in the spending review."

But, writing in the Times newspaper, Labour leadership candidate Ed Balls urged his party to put across a "credible argument against slashing public spending".

He said the Conservatives were using their Lib Dem coalition allies as "cannon fodder", while the government implemented policies "of the right", such as budget cuts.

Here is the full text of the letter from David Cameron and Nick Clegg:

Dear colleague,

In the weeks ahead you will be engaging in vital negotiations with the Treasury about the Spending Review, with important decisions to be made to deal with the legacy of the previous government and restore health to the public finances and confidence to our economy. In that context we thought it would be helpful to remind you of the discussions held at our cabinet meeting at Chequers just over a week ago - and the conclusions we reached about the central purpose that will guide all our decisions as a government.

Deficit reduction and continuing to ensure economic recovery is the most urgent issue facing Britain. We agreed that, as we deliver this, our government's purpose is to make two major shifts in our political and national life:

The first is a radical redistribution of power from government to communities and people, to reverse decades of over-centralisation. Almost all our plans involve giving individuals, families and communities more control over their lives - whether that's through opening new schools, giving locally elected councillors a say over local NHS services or holding local police to account. The importance of this approach cannot be overstated. It underpins our attitude to public service reform. It animates our plans for genuine localism. It explains our focus on government transparency. If we are true to this purpose then the people of this country will feel a new sense of power and responsibility in their daily lives.

The second fundamental change is that this government, unlike previous governments, will govern for the long term. That's why we are prepared to take the difficult decisions necessary to equip Britain for long-term success. This approach not only underpins our commitment to safeguarding our environment for future generations and to restoring transparency and accountability to our politics, it must also underpin everything we do in the spending review. That means welfare reform that will get people off benefits and into work; effective support for children in the crucial early years to provide them with a fair chance in life; tackling the blight of youth unemployment and long-term investment in our infrastructure to build a competitive and sustainable economy for the future. These should be our priorities, not the short term gimmicks, top down dictats and wasteful subsidies of the past.

So this is the purpose of our government, in one sentence: putting power in the hands of communities and individuals and equipping Britain for long-term success. Over the course of the Spending Review we need you to ensure that this purpose is felt across your departments. Whatever the options on the table, whatever the decision to be made, the same questions must be asked: will it put more power in people's hands? And will it equip Britain for long-term success?

Finally we want to thank you for your hard work and commitment to this coalition. It's been an intense and at times tough twelve weeks - we hope you get a good summer break.