Exceptionally unpleasant propaganda seeps out of the Department of Work of Pensions. In the past, the DWP press operation was always reasonably straight under both Tory and Labour governments, following normal civil service practice. Whitehall press officers promoted their ministers' policies. But I have never known this degree of politicisation.

This week the DWP put out a press release on benefit fraud, not attached to new figures or anything in particular. It offered a string of juicy anecdotes of disgraceful excuses used by cheats: "A benefit fraudster claiming his wife was really his sister and one saying she needed the cash for satellite TV are both examples of some of the oddest excuses DWP benefit fraud investigators have heard over the last year. One claimant – using a fake ID – said her skin colour had changed after a road accident, one man blamed his evil twin, while another claimed she wasn't in a relationship but just had a three-night stand resulting in three children over five years." Every magistrate hears idiotic excuses from stupid criminals, but this is the DWP's unsubtle nudge that all claimants are fraudsters beneath the skin.

I spotted the story in other papers, but never saw the press release and it's not on the DWP website, which is odd. I asked a senior press officer who said airily, "Oh it was just lighthearted, one of those end of recess stories." Who was it sent to? I didn't get one, did anyone at the Guardian? "No, I don't think anyone did." That's how Iain Duncan Smith and Lord Freud set about poisoning public opinion, their one success.

"Hardworking taxpayers lost an outrageous £1.2bn in benefit fraud last year," it says, without adding that DWP figures show a fraud rate of 0.7% – less than average for private companies and retailers. Vigilance against fraud is essential for public trust in social security – but these ministers deliberately undermine that trust: one good anecdote is worth shed-loads of statistics.

Why this now? The clue is in a quote from Lord Freud: "Universal credit will close the gaps in the welfare state that cynical benefit cheats try to take advantage of. The new benefit will reduce fraud by £200m a year when rolled out fully." This was put out just ahead of the National Audit Office's excoriating report on universal credit, which specifically warns that the new IT system cannot identify potentially fraudulent claims, so manual checks have to be done instead, but "such checks will not be feasible or adequate once the system is running nationally". There must be some degree of misrepresentation that a permanent secretary should refuse to sanction.

I have lost count of the statements and speeches where Duncan Smith and Freud have sworn blind everything was on track and on budget. I have never known so much whistleblowing from within a department about the failing system, the chaos, the people sitting around doing nothing. The NAO complains about a "fortress culture", and indeed serial denial continues to cover the chaos with bluster, diverting attention with smears against claimants. If universal credit collapses or is delayed to beyond the blue yonder, it will be a shame that a project every government considers, but shies away from in its enormity, is wrecked by incompetence, arrogance and a political imperative to rush. Combining the records of HMRC and DWP so everyone is assessed on what to pay or receive in tax and benefits according to real-time changes in income or family circumstances is the gold standard, especially for those in and out of temporary jobs.

But this delivery system doesn't define the generosity of benefits within it. UC's reputation may be damaged when Duncan Smith's deep benefit cuts mean it won't, as promised, ensure working extra hours always pays more: people will in fact still lose an average 65p in every extra pound they earn. Duncan Smith may now find he is even starting to lose public support for benefit bashing, as the next British Social Attitudes survey may suggest softening public sympathies.

The elephant-sized problem of the benefit budget lies far outside the narrow remit of the DWP and its petty spite. The ineluctable rise in the need for state support is driven by the plunge in pay. The Resolution Foundation's report this week, Low Pay Britain 2013, described the growing gap in a two-tier workforce, as managerial and professional pay surges ahead while a million more fall into low pay, below the £7.45 an hour living wage. Britain has suffered the biggest fall in working incomes in the G7 countries, with half the working population losing an average £1,500. There has been nothing like this in living memory.

Here's what's happened: if since its 1999 introduction, the minimum wage had kept pace with FTSE 100 directors, it would now be £19 an hour. Instead, it keeps falling further behind. The share of GDP that goes into pay continues to fall, as more is taken out as profit. In the Commons debate this week on living standards, Tory speakers one after another boasted of 1.3m new jobs – but a third are part-time and a third are temporary, with a million people on zero-hour contracts. They boasted of raising the income tax threshold – but low-paid families are still £890 worse off from cuts than they gain in tax.

Rachel Reeves made a good speech as one Labour MP after another rose to tell of the million more claiming housing benefit, the soaring cost of childcare, rising rents, mounting debts due to uncertain pay or sudden benefit withdrawal, and food banks struggling to cope.

Labour's analysis is strong; the facts show a frightening trajectory of ever-rising inequality. Whose recovery is this? That's the great general election question: is it just for the upper echelons? Labour has good ideas and strong instincts – but its cautious remedies still fall short of a policy that would make a significant shift in earnings. There are signs that the Tories might jump ahead by promising sharper rises in the minimum wage, with two ministers hinting at it and a Newsnight leak.

If competition over living standards for low and middle earners does become the next battleground, that's a cause for celebration. But if so, Labour needs to keep well ahead. Housing, childcare, jobs for the young and stopping cartel fuel and rail prices are all Labour turf, but this autumn a bolder structural policy on sinking pay has to show where Labour would lead the country in the long term, or the benefit bill will go on rising.