Owen Smith has launched his campaign for the Labour leadership by vowing to re-write the party’s constitution to put tackling inequality at the heart of their pitch for government.

Smith, the Pontypridd MP, also promised to introduce a £200bn investment fund to build new colleges and hospitals and improve transport infrastructure, and to bring in a new war powers act to make sure no future government could take Britain into conflict without proper parliamentary scrutiny.

Smith said he would “heal” the party by involving grassroots members more closely with its leaders and confirmed he backed the idea of a possible second referendum on the terms of Brexit.

Speaking at the Coleg y Cymoedd – College of the Valleys – in south Wales, Smith said he agreed with the current Labour leader Jeremy Corbyn on key issues such as austerity.

But he said: “We need more than posturing, we need more than sloganising. It’s not enough just to be anti-austerity, you have to be pro something. I’m pro prosperity, I am pro standing up for working people.”

Speaking in front of party workers and his family, Smith described himself as a “man of Pontypridd”. He said his political coming of age was at the time of the miners’ strike and said he only realised when he was nine or 10 that the Labour greats Aneurin Bevan and Keir Hardie were not family members. “I’m a proud patriot, a Welsh patriot, a British patriot and a proud socialist,” he said.

He spoke of his grandfather, who worked down the mines, and grandmother, who left the Welsh valleys to go into service in a great house in London in post-war Britain and were Labour supporters. “They understood what Labour was for. I think many of us in the movement feel we have lost our way from those bold times,” he said.

Smith said Britain and the Labour party were in crisis.

“We are in a moment of crisis in Britain right now, not just in the Labour party. But our crisis in the Labour party is in truth reflective of a deeper crisis we face in society. We are a country that is not at ease with itself, that is divided. We are not progressing in the way we once did. We’re a country where people feel that their wages, their security, the future of their communities, the hopes they have for their children, cannot be realised.”

But three times he said that Labour was “not on the pitch”. “We’re on the sidelines,” he explained. “We’re not speaking for Britain.”

He said: “Jeremy has been right about so many things. The Labour party has to be a party about investment not cuts, we have to be a party that understands that austerity is utterly self-defeating. This Tory government that is running rampant right now in our country is so rampant they feel they can make Boris Johnson foreign secretary. That government doesn’t understand our communities, it doesn’t understand the dangers and the damage that it has wrought through imposing austerity.”

Smith focused on five proposals. He said he would:

Re-write clause four of the Labour party’s constitution – what he called the beating heart of the party. “Inequality, it’s a disgrace. We have a wider gap between the haves and have-nots than any of us have known in our life time,” he said. “I want to re-write clause four to put tackling inequality right at the heart of everything we do.” Every Labour party policy had to be tested against that benchmark, he said.

Smith said he would introduce a British New Deal – a £200bn investment fund to spend on colleges, hospitals, roads, rail. He also said he would re-nationalise the railways.

He said he would re-instate the Department for Energy and Climate Change, which the Tory government is to close. And make sure every department worked towards a low-carbon future.

Smith said he would bring in a “proper ethical foreign policy”. He added: “The Labour party is always a party that believes in peace and internationalism above everything else. War is only ever a very last resort for us. But we are not a pacifist party.” He said it had been wrong to go to war in Iraq. “We made the wrong decision,” he said. A new war powers act would allow parliament to properly scrutinise the government of the day, he argued.

Smith said he would form a shadow cabinet – and also a cabinet of Labour members – to make sure the party leaders knew what the members thought and wanted.

On a second Brexit referendum, he said he thought the British people had been lied to by those that campaigned to leave the EU. “People are now starting to wonder whether they got what they wanted. If public opinion is such that people think they have not got what they expected, we should trust the people once more to rubber-stamp [the decision to leave].”

Smith concluded: “Party members are our life blood. We’ve got to figure out a way in which we come together, heal this party. Divides ... must be put aside.” He added: “That is why I am standing for this leadership, to heal our party, to unite us.

“Our party cannot split. There is a clear and present danger that some in our party are fatalistic about the prospect of that split. It cannot happen. It will not happen. Never on my watch. We cannot afford it to split. Working people in this country cannot afford the Labour party to split.”