The Parliamentary Home Affairs Committee has insisted that the government should not build any more large databases of citizen information without justifying why they are necessary.
Such databases increase the perception among citizens that they are under surveillance and thus undermine the basic trust between state and citizen, according to the Committee.
"Privacy plays an important role in the social contract between citizen and state. To enjoy a private life is to act on the assumption that the state trusts the citizen to behave in a law-abiding and responsible way," said the report.
"Engaging in more surveillance undermines this assumption and erodes trust between citizen and state."
The Committee also pointed out that the government simply cannot be trusted with the data, citing the child benefit records debacle at HM Revenue & Customs in October 2007.
The government has been urged to adopt a principle of data minimisation and only build new databases "based on a proven need".
Information Commissioner Richard Thomas gave his support to the Committee's proposals.
"Before new developments take place which could increase levels of surveillance, full consideration must be given to the privacy impact on individuals, and on ensuring that safeguards are in place to minimise intrusion, " he said.
Thomas added that personal data should be collected by the government "only in ways which are necessary, justified and proportionate".
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