The archbishop of Canterbury has denounced David Cameron's "big society", saying that it comes across as aspirational waffle that was "designed to conceal a deeply damaging withdrawal of the state from its responsibilities to the most vulnerable".

The outspoken attack on the prime minister's flagship policy by Rowan Williams – his strongest to date – is contained in a new book, Faith in the Public Square, that is being prepared for publication ahead of his retirement.

Passages from the book, obtained by the Observer, reflect the archbishop's deep frustration not just with the policies of Cameron's government and those of its Labour predecessors, but also with what he sees as the west's rampant materialism and unquestioning pursuit of economic growth. Williams also laments spiralling military expenditure, writing that "the adventure in Iraq and its cost in any number of ways seems to beggar the imagination".

But it is his suggestion that the big society – Cameron's personal vision of a more active civic society – is seen by people as a deliberate cover for plans to shrink the state that will be most controversial. On Saturday night, Cameron revealed he was considering scrapping most of the £1.8bn in housing benefits paid to 380,000 under-25s, worth an average of £90 a week, forcing them to support themselves or live with their parents. He also told the Mail on Sunday he might stop the £70-a-week dole money for the unemployed who refuse to try hard to find work or produce a CV.

Commenting on the "big society", Williams, who steps down in December after 10 years in his post, writes: "Introduced in the runup to the last election as a major political idea for the coming generation, [it] has suffered from a lack of definition about the means by which such ideals can be realised. Big society rhetoric is all too often heard by many therefore as aspirational waffle designed to conceal a deeply damaging withdrawal of the state from its responsibilities to the most vulnerable."

He suggests that ministers have fuelled cynicism over the Cameron vision by failing to define what the role of citizens should be. "And if the big society is anything better than a slogan looking increasingly threadbare as we look at our society reeling under the impact of public spending cuts, then discussion on this subject has got to take on board some of those issues about what it is to be a citizen and where it is that we most deeply and helpfully acquire the resources of civic identity and dignity."

Williams has never been afraid to wade into sensitive political issues during his decade at Lambeth Palace. But his valedictory work, to be released three months before he leaves office, is more strident in its criticism than anything that has come before. It is certain to cause fury in the government, which is being criticised, including from some Conservatives and Liberal Democrats, for lacking a compelling message other than the necessity of public spending cuts and austerity.

A perception that the government is failing to prioritise the needs of the most vulnerable as it pursues growth has spread since the chancellor, George Osborne's, decision to end the top 50p rate of tax on incomes of more than £150,000 a year in his March budget.

In a powerful section questioning economic assumptions that govern modern societies, the archbishop takes issue with the idea that growth, defined as increasing production, is necessarily a good thing. "Practically speaking, at the individual and the national level, we have to question what we mean by growth," he writes. "The ability to produce more and more consumer goods (not to mention financial products) is in itself an entirely mechanical measure of wealth."

The archbishop argues this mindset creates new demand for goods and thus new demands on a limited material environment for energy sources and raw materials. "By the hectic inflation of demand it creates personal anxiety and rivalry. By systematically depleting the resources of the planet, it systematically destroys the basis for long-term wellbeing. In a nutshell, it is investing in the wrong things."

No 10 said: "The launch of Big Society Capital in April is a concrete example of the government delivering on its plans – £600m to help create a funding model that is truly self-sustaining and that will help charities and social enterprises to play their part in building a bigger society."

The archbishop says that the Labour party was wrong in 2006 to make incitement to religious hatred a criminal offence, arguing that anti-Muslim statements could show courage. "The creation under British law of a criminal offence of incitement to religious hatred has provoked bitter and sustained controversy. Disproportionate attention has been given to a hypersensitive minority.

"Some anti-Muslim images or words (foolish and insulting as they may be) may well exhibit courage in a world where terrorist violence reaches across every national boundary."

Publisher Robin Baird-Smith, who runs Continuum, part of Bloomsbury, said that the book was "a powerful, carefully reasoned rebuttal of Williams's critics. This is not a work of theology. It is a book about the role of religion in public life – it touches on economics, ecology, public morality, atheism," he said. "This is thus a book of supreme importance."

• This article was edited on 28 June 2012 to remove this quote, supplied to us by the publisher of Faith in the Public Square: "To suggest that the Muslim owes an overriding loyalty to the international Muslim Community (the Umma) is extremely worrying. Muslims must make clear that their loyalty is straightforward modern political loyalty to the nation state." This is a representation of a view that the archbishop does not hold. It was drawn from a lecture he gave in October 2004 in which he went on to deconstruct the argument, maintaining that religious loyalty and political loyalty should not be seen as being in direct competition.

