A group of Conservative MPs are trying to seize the political agenda with some of the most rightwing ideas the party has seen in decades – and many are taking them seriously

'The talented and hard-working have nothing to fear," says Dominic Raab, Conservative MP for Esher and Walton, with just the faintest hint of menace. It is an airless, lazy day in mid-August. The House of Commons cafe is half-deserted. But Raab, firm-jawed, slightly gaunt and a rising star of the Tory right, is spending the parliamentary recess in the traditional manner of ambitious politicians: using the Westminster news vacuum to attract attention to himself and his ideas.

Wearing jeans, the 38-year-old backbencher is talking – warily – about transforming the British workplace. He thinks current employment law offers "excessive protections" to workers. "People who are coasting – it should be easier to let them go, to give the unemployed a chance. It is a delicate balancing act, but it should be decided in favour of the latter."

Last Friday, a leaked fragment from a book co-written by Raab and four other Conservative MPs, Britannia Unchained: Global Lessons for Growth and Prosperity, due to be published next month, appeared in the London Evening Standard. The passage, red meat for phone-ins and columnists ever since, argued less politely for an improvement in our national work ethic: "The British are among the worst idlers in the world. We work among the lowest hours, we retire early and our productivity is poor. Whereas Indian children aspire to be doctors or businessmen, the British are more interested in football and pop music."

Further detailed revelations about the book remain forbidden by a pre-publication embargo. But having read it, I can safely say that Britannia Unchained has a brevity, pace and scope that elevates it a little above the usual pre-party-conference polemics. "Britain is at a crossroads which will define our place in the world for generations," begins one of its publisher's sales pitches. "From our economy, to our education system, to social mobility and social justice, we must learn the rules of the 21st century, or we face an inevitable slide into mediocrity."

When I speak to Raab again after the Evening Standard extract, he says it gave "a skewed and inaccurate reflection of what is in the book". Yet over the last year he and his co-authors, all of them members of a new Conservative parliamentary faction called the Free Enterprise Group, have made little secret of the harsh medicine they believe Britain needs to take. Last year, for example, Raab wrote a paper for the Centre for Policy Studies (CPS) – since the birth of Thatcherism one of the radical right's fiercest thinktanks – urging that "the definition of fair dismissal should be widened ... to encompass inadequate performance ... [This] would help employers get the best from their staff." The paper also argued for exempting small businesses from paying the minimum wage for under-21s, the already less-than-lavish hourly sum of between £3.68 and £4.98.

Raab has been an MP barely two years. Before winning a huge majority of 18,593 in one of the wealthiest seats in the country, he studied law at Oxford and Cambridge, practised in the City of London, and worked at the Foreign & Commonwealth Office. He only joined the Conservative party in 2005, after the worst of its modern slump was over. Yet during our interview, it steadily becomes clearer that his confidence derives from more than this assured personal trajectory. There is also his belief that the radical right's time is coming. "I'm a big Thatcher fan," he says, dropping his guard a little as the interview approaches its end. "The coalition has done a lot of good incremental work, on the deficit and so on. Do I think we need a more decisive shift to build on what the coalition has done? The answer is a definite yes."

It may come as a surprise to those who already consider the coalition a tough government, with its hairshirt rhetoric and seemingly endless spending cuts, but a growing number of Tory backbenchers, business figures, commentators and thinkers feel that the coalition – and by implication, other austerity governments across the west – is not nearly tough enough. Since 2011, as the British economy has slumped, this energetic but largely unnoticed political alliance, somewhere between a lobby group and a proper movement, has begun to show its strength.

Elizabeth Truss, a member of the Free Enterprise Group. Photograph: Karen Robinson

Since last autumn there has been the smouldering controversy about the Beecroft Report, a government-commissioned review of employment law by the powerful venture capitalist and Tory donor Adrian Beecroft. His recommendations, even more wide-ranging than Raab's – including the loosening of regulations covering the employment of children – have so far proved too contentious to be adopted by the increasingly fragile coalition. But they have become close to a sacred cause for the administration's proliferating critics in the rightwing press. Sometimes the demands for bolder government are frank: "Come on Dave, be brave," [paywall] urged the Sunday Times in May. "A bonfire of regulation was promised, but few businesses report any relaxation in red tape." Sometimes the demands are more oblique: last month, a series of Daily Telegraph articles themed as "Britain Unleashed" mixed essays on the virtues of unfettered capitalism with admiring references to other countries – usually Asian – where supposedly more red-blooded free markets operate.

In January, the chief executive of Britain's biggest insurer Prudential, Tidjane Thiam, told the annual gathering of the global elite at Davos that across Europe, "the minimum wage is a machine to destroy jobs." Speaking at the South Bank Centre in London the following week, the far-sighted BBC economics journalist and author Paul Mason interpreted Thiam's remarks as a sign of an emerging "more radical version of neoliberalism, where we're basically, finally, told: 'The race to the bottom, to be like China, is on, and we're all going to do it. So your wages will meet the Chinese somewhere, and so will your social conditions ... abolish minimum wages, abolish social protection." In the audience, which had gathered to hear Mason talk about the leftwing, street-politics response to the economic crisis, not a formidable new rightwing one as well, there were a few seconds of uncomfortable silence.

"The European economic and welfare model – I think it's over," says Mark Littlewood, director of the Institute of Economic Affairs (IEA), like the CPS a veteran British free-market thinktank reinvigorated by current possibilities. He favours cutting state spending in Britain by over a third, and leaving citizens with a "basic safety net". Yet he finds the coalition far too cautious. "There has been an incredibly modest reduction in public spending. It's as if the coalition have arrived at the scene of a road accident: they've urgently applied a tourniquet to the bleeding patient, but that's it. There's no rehabilitation programme to make the patient leaner, meaner, fitter." In part, he blames Tory fears about their party becoming "retoxified": "I've argued at the top levels of government, 'Scrap the minimum wage.' But then there's a sharp intake of breath. Anything that looks like a return to the Dickensian workhouse raises hackles. But I don't want people working in sweatshops at 5p an hour. You should sell abolishing the minimum wage in positive terms, as providing young people with a first step on the jobs ladder, as a 'jobs for all' scheme."

Tim Montgomerie, editor of the influential Tory website Conservative Home, says the coalition has placed itself in the worst of both worlds, "talking tough but not acting tough". Also, until late 2008, well into the financial crisis, the Tories supported increases in public spending over deficit reduction; then they abruptly reversed their position. Montgomerie argues that this opportunistic radicalism is not respected by voters, hence the government's poor poll ratings. Like Littlewood and others, he favours a more authentically bold approach, a "rescue plan for the country" involving much deeper spending cuts, a loosening of the planning system and reduced employee protections.

"It's a pretty depressing time for the Conservative party," says Montgomerie, "but the thing that gives me hope is the [parliamentary] class of 2010, and all the groups they've formed. Of those groups, the Free Enterprise Group is the group. They're quite spiky in their opinions, but well respected by the Conservative leadership. They are George Osborne's favourites. He has spoken to them. In some ways, it helps him to have them, so he can say, 'I'm not the [government's rightwing] outrider.'" In June, a cover story on the group in the Tory house magazine the Spectator announced, "Not since the late 1970s has there been a group of Tories thinking so hard, with such freedom, about the future of their country."

Priti Patel … a potential party leader? Photograph: Sarah Lee for the Guardian

Founded in October 2011, the group lists 38 supporting MPs on its website. The membership is youngish, more female and less white than the Conservative parliamentary party as a whole. It includes many of the new MPs currently identified by Tory-watchers as potential party leaders, including Raab, Kwasi Kwarteng, Priti Patel and Elizabeth Truss. The fact that David Cameron leads a coalition rather than a Conservative administration has given the group a rare freedom to criticise government policy and suggest alternatives. Sometimes these are less fearsome than you might expect – Raab likes the French healthcare system; Truss admires the German economy – but often the foreign models cited are Asian, and the underlying message for Britons is relentless: raw capitalism is the only game in town, and you need to start working much harder. "We can all graft," says Raab.

The group do not expect this revolution to happen overnight. Last year, Raab and his co-authors published a predecessor to Britannia Unchained for a smaller publisher, titled After the Coalition: A Conservative Agenda for Britain. "The last 30 years of public debate in Britain has been dominated by leftwing thinking," the introduction rather startlingly declared, as if the transformative 18 years of the Thatcher and Major governments had never happened. On the new radical right, there is sometimes a reluctance to compare the changes envisaged for Britain to Thatcherism: partly, you suspect, because the supposed need for these changes implies that her rightwing project, to a degree, failed; and partly because she was just so divisive. "Raab and the Free Enterprise Group are a million miles away from Norman Tebbit in the way they present their arguments," says Littlewood.

Yet he and the others may have to wait longer than the next general election before implementing their vision of what you could call "austerity max". A Tory majority in 2015 looks increasingly unlikely, let alone one big enough to sustain a truly iconoclastic government. And would ever more radical policies really revive the party's sagging popularity? Labour leftwingers were derided in the early 80s for making exactly that argument. History proved their critics at least partly right. Also, Montgomerie acknowledges, all the coalition's austerity rhetoric since 2010 means that "Toughness is a harder sell now [for the Tory radicals]. The government has already played the 'tough' card."

Public opinion has turned flintier in recent years on welfare spending. But such a mood swing often occurs at the end of Labour administrations and the beginning of Conservative ones, and often reverses, into distaste at an "uncaring" government, once the British right has been in power for a few years. The popular mandate for the coalition's broader spending cuts, if it ever truly existed, has already crumbled. And on tax and capitalism in general, public opinion is, if anything, moving leftwards, as tax cheats and feckless bankers solidify into popular demons. Littlewood admits, "There isn't yet a readiness from the British public to say, 'We've got to go back to the [rightwing] drawing board.'"

In radical right circles, it is strikingly common to hear comparisons between Cameron's government and that of his Tory predecessor Edward Heath: narrowly elected in 1970, briefly tough before a chaos of U-turns, replaced in 1974 by an often equally beleaguered Labour administration – before the right's big moment finally arrived in 1979, with Thatcher's election. If history repeats, which it rarely does exactly, we should expect the Unchaining of Britannia to commence in 2019.

In the meantime, after half a decade, already, of widespread pay freezes and anxiety, and with Labour under Ed Miliband quietly accepting that they will next hold power in hard times too – "There is a new world out there," the much-tipped young Labour backbencher Stella Creasy recently told this paper, "in the next [government] spending review absolutely everything should be on the table" – the toughening-up of Britain is arguably well underway.

Are we a nation of idlers? I'm not sure we were completely complacent even during the fat years of the 90s. Here is Tony Blair at the 1999 Labour conference: "All around us the challenge of change ... technological revolution ... global finance and communications ... These forces ... wait for no one and no nation." Perhaps it is the fate of all old nations to be told to pull their socks up by politicians.