Media playback is unsupported on your device Media caption David Cameron: "Millions of working-age people sitting at home on benefits even before the recession hit."

Unemployment benefits could be cut for people who fail to get work over long periods of time, under Conservative plans to change the welfare system.

People receiving payments could also be expected to learn to read, write and count, to make them more employable.

Prime Minister David Cameron said the system had gone "truly awry" and a "culture of entitlement" had to be addressed to boost the economy.

But Labour accused him of using the "wrong approach" to joblessness.

In a speech in Kent, Mr Cameron said he wanted to debate ideas for welfare reform before the Conservatives produced their manifesto for the next general election.

It had been widely reported that he would propose varying the rates at which benefits are paid according to the cost of living in different regions. This was dropped from the final text of his speech , but Downing Street insisted it was still among ideas to be discussed.

Proposals outlined by Mr Cameron included:

Out-of-work benefits linked to wages rather than inflation, if wages are lower

A cap on the amount people can earn and still live in a council house

Reduce the current £20,000 housing benefit limit

Stopping the out-of-work being better off by having children

Consider paying some benefits "in kind" rather than in cash

Expecting parents on income support to prepare for work while children have free nursery care

Getting the physically able to do full-time community work after a period out of work

Sickness benefit claimants should take steps to improve their health

Mr Cameron's speech is being seen as an attempt to reconnect with disgruntled Tory backbenchers who have accused him of allowing the Liberal Democrats to water down traditional party values.

The prime minister said he hoped the Lib Dems might agree with some of the ideas so they could even be brought in before the next election, which is due in 2015.

His deputy, the Lib Dem leader Nick Clegg, told the BBC: "David Cameron was speaking as a leader of the Conservative Party about his own personal ideas, about the kind of things he would like to see happen after 2015. He's entirely free to do so, as is any leader of any political party."

Regional rates of benefits - which would presumably see people in more affluent regions getting higher payments than in poorer regions - would be likely to prove controversial.

No 10 stressed, an hour before Mr Cameron's speech, that no decision had been taken but the PM wanted to look at whether "it makes sense if you set all benefits at the national level or whether there should be some local or regional element".

The prime minister defended benefits for the elderly and disabled but said the system of working-age benefits had gone "truly awry" and created a "welfare gap between those living long-term in the welfare system and those outside it".

Analysis David Cameron is not just calling for a minor tweak to the welfare state - he is opening the door to a re-casting of the entire welfare system and who it is meant to serve. "The time has come to go back to first principles," he says. If the welfare state is meant to be a safety net, he argues, then a lot of people are receiving benefits who are not in need, and therefore should not be receiving them. Hence he raises the prospect of limits to the amount of support claimants should expect for larger families; curbs to the rights of young people to get help with their rent; and tougher requirements on those seeking work. It is a bold statement of intent that will reassure and please an unsettled Tory party, both inside and outside Parliament. But it carries with it a huge political danger? It risks undermining what was Mr Cameron's core pitch to the electorate, namely that he was a different sort of Tory leader. His critics will seize on this - together with the apparent playing down of the green agenda and wobbles over gay marriage - as further evidence that Mr Cameron is turning his back on Compassionate Conservatism and returning to a much more traditional Tory agenda.

"Those within it grow up with a series of expectations: you can have a home of your own, the state will support you whatever decisions you make, you will always be able to take out no matter what you put in.

"This has sent out some incredibly damaging signals. That it pays not to work. That you are owed something for nothing. It gave us millions of working-age people sitting at home on benefits even before the recession hit. It created a culture of entitlement.

"And it has led to huge resentment amongst those who pay into the system, because they feel that what they're having to work hard for, others are getting without having to put in the effort," he said.

He said the housing benefit system for people under 25 encouraged young people to "grab" their independence through the benefit system rather than earn it.

"For literally millions, the passage to independence is several years living in their childhood bedroom as they save up to move out while for many others, it's a trip to the council where they can get housing benefit at 18 or 19 - even if they're not actively seeking work, " he argued.

Figures from the Department of Work and Pensions show that, out of the 385,000 under-25s claiming housing benefit, 204,000 have children.

Mr Cameron said it was necessary to look at the "interaction of the benefit system with the choices people make about having a family", arguing the welfare system encouraged working-age people to have children but not work, making taxpayers resentful.

He also suggested there could be a loosening of benefit conditions for those who have paid into the system through work but have lost their job, against those who have never worked.

Other questions Mr Cameron raised but did not address in detail were whether school leavers should be allowed to draw benefits, whether non-contributory benefits should be paid to those living abroad and if the majority of benefits should continue to be paid in cash rather than in kind.

His idea to scrap housing benefit for people aged under 25 would save almost £2bn a year, but housing charity Shelter fears the consequences of such a move.

Chief executive Campbell Robb said: "To take away housing benefit from hundreds of thousands of young people - particularly in the current economic environment where young people in particular are finding it very difficult to find jobs - would have a devastating impact on many people's lives.

"I think we would see many more people ending up homeless as a result of this kind of very significant change."

For Labour, shadow work and pensions secretary Liam Byrne said the prime minister was "coming at it from the wrong approach for the long-term".

"First we need stronger action to help people get back into work so Labour has said 'Let's put in place a jobs guarantee for young people'. We're starting a debate about how childcare and social care could actually help people work the hours that are on offer," he said.

In March, the government's Welfare Reform Act received Royal Assent. That act - which applies to England, Scotland and Wales - introduces an annual cap on benefits and overhauls many welfare payments.

Chancellor George Osborne indicated in his March Budget that the welfare bill should be cut by another £10bn between 2015 - the expected year of the next election - and 2017. That is on top of the £18bn of cuts during the current parliament.