Jobless young adults would lose their automatic right to some state benefits under a Labour Government to encourage them to find work, Ed Miliband will announce on Thursday.

The 18-21 age group would no longer qualify for Jobseeker’s Allowance (JSA) and income support if they had skills below Level 3. If they undertook training to try to reach that level, they would qualify for a £57-a-week allowance, the JSA rate for under-25s. It would be means-tested and paid only if their parents’ joint income were less than £42,000 a year. Unemployed young adults would normally be expected to live with their parents rather than claim housing benefit.

The “tough love” plan is aimed at tacking the problem of almost one million “Neets” – young people not in education, employment or training. It would affect about 100,000 people, seven out of 10 of the 18-21 group claiming JSA. Current benefit rules prevent them training while looking for work.

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Labour claims the move would save at least £65m a year in lower benefit payments and much more in the long run, because a “Neet” costs the Government more than £2,000 a year for the rest of their working lives.

Although denying benefits is bound to cause controversy, Mr Miliband will describe the move as “progressive not punitive”. It would not apply to people with young children or disabilities, which prevent them preparing for work. He will say the present system is unjust for young people not at university because they get no state support if they do more than 16 hours a week of training or further education.

The proposal forms part of a blueprint published by the IPPR think tank on how to create a fairer society in an age of austerity. The “Condition of Britain” report will shape the policies on which Labour will fight next year’s general election.

Mr Miliband will also endorse the IPPR’s plan to restore the contributory principle to the heart of the welfare system. Under Labour, the higher rate £71-a-week JSA, currently paid to people who have been in work for two years, would kick in only after five years in work, but the level would be raised by between £20-£30 a week.

The Labour leader will also back the IPPR’s proposal to switch spending from housing benefit to housebuilding. Local authorities would keep some of the savings from negotiating lower rents with landlords to spend on building new homes, bringing down the £24bn annual housing benefit bill in the long term.

Labour hopes the new policies will tackle its image as “the welfare party” and boost its economic credentials. Launching the report, Mr Miliband will commit Labour to “big changes” without “big spending". He will say: “We face an economy where inequality is rising, year after year, and where so many people feel locked out of the chances that previous generations enjoyed. Turning that round is the mission of the next Labour Government.

“We must do so at a time when our country continues to confront a fiscal situation the like of which we have not seen for generations, the result of a financial crash the like of which none of us have ever seen. So we can’t just hope to make do and mend and we can’t just borrow and spend money to paper over the cracks.”

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Admitting that such changes will be “tough”, Mr Miliband will call for “far-reaching reform that can reshape our economy so that hard work is rewarded again, rebuild our society so that the next generation does better than the last, and change our country so that the British people feel it is run according to their values.”

The Labour leader will argue: “The perversity of the [social security] system means that the one thing we most discourage those young people from doing is getting the skills they need for a decent career. The system is telling them that they should sign on for benefits not sign up for proper training but at the same time, it is saying to those who go to university that they are entitled to financial support.”

He will add: “There can be no better example of a divided country which seems to value the 50 per cent of young people who go to university more than the untapped talents of the 50 per cent of young people who don’t.”

Ed Miliband’s six headaches

The lack of a big offer

Labour does not lack policies. Individual measures, such as a 20-month energy price freeze, are popular in themselves but have not yet been knitted together into a positive, forward-looking vision. Some Labour MPs fret about “unpopular populism”.

The economy, stupid

Labour’s lead in the opinion polls is being eroded as the economy improves. Although the polls still point to a Labour majority, the momentum is with the Conservatives. Some Labour MPs fear Mr Miliband’s “cost of living” agenda is past its sell-by date.

Age of austerity

Many voters still blame the Coalition’s cuts on overspending by the previous Labour Government, even though Labour insists they were caused by a global crisis. Labour trails the Tories on economic competence and has not yet spelt out where it would cut spending in the 2015-2020 parliament.

His personal ratings

Voters do not yet see Mr Miliband as a Prime Minister-in-waiting, and he trails David Cameron. The Tories will present next year’s election as “a choice between two PMs”, while Tory-supporting newspapers portray Mr Miliband as “weak” and “weird”. An Ipsos MORI poll yesterday showed that 49 per cent of people think he should be replaced, including 43 per cent of Labour supporters. A YouGov survey suggested his brother David would have a better chance of winning the election.

Unforced errors

Labour MPs are worried that Mr Miliband is making mistakes. The latest was his decision to pose for The Sun holding a copy of its World Cup edition. Later he said sorry. Critics are worried that his inner circle lacks experience and political nous – and that there is too much internal rivalry.

The Ukip effect

Last month’s European and local elections showed that Ukip is gaining ground among working class voters. Some Labour MPs believe the party underestimated Ukip and that Nigel Farage’s party could deprive Labour of victory in some key marginal seats next year.