Government also removes equality watchdog's obligation to consider policy impact on poor and downgrades role of chair

The Equality and Human Rights Commission has been stripped of its duty to promote a society with equal opportunity for all and had its budget and workforce halved, the government has announced.

The move comes days after the watchdog chided ministers for failing to consider how crucial policies would affect women, disabled people and ethnic minorities.

The EHRC has long been a bugbear for the Tory right who see it as a relic of the past. It has also been criticised by MPs for financial mismanagement after the National Audit Office (NAO) refused to sign off the commission's accounts for three years in a row.

In a widely anticipated shakeup, equality minister Lynne Featherstone said the commission would seek a new chair to replace Trevor Phillips, the former television executive and presenter, and conduct a review of the commission's budget.

Last year, the NAO found that commission staff were "paid too much" and said the quango spent £1.6m "without authority".

The EHRC will have its budget halved to £26m by 2015 and staff numbers will drop to 180 – down from 455 in 2010. The new chair will be paid £56,000 a year for two days a week compared with the £112,000 Phillips earned for a three-and-a-half day week.

Ministers have brought forward a key review to next year and warn that if progress is not made the EHRC risks being broken up.

"We will seek to implement more substantial reform to ensure that the EHRC's core functions are discharged effectively and efficiently in the future. This could mean more fundamental, structural changes to the EHRC's remit including some functions being done elsewhere, or splitting its responsibilities across new or existing bodies".

In part the changes aim to dismantle a legacy left by the previous government. Featherstone said the government would repeal the obligation to assess whether policies affect the poor, which when introduced by Labour was characterised as "socialism in one clause". The minister said instead the "socio-economic duty" would be repealed.

Unions also said the responses to the government's earlier consultation "clearly show overwhelming opposition" to the repeal of specific sections of the Equality Act 2006. However, ministers have "decided to scrap vague, unnecessary and obsolete provisions" so the EHRC could focus "on its core functions".

In a package of measures, £10m of grants would be cut from the EHRC budget, reducing funding for many local equality groups. Also axed is the helpline run for disabled air passengers to handle complaints about poor service.

In its own submission to the government, the commission said it "remains to be convinced that a sufficiently strong case" has been established over losing its commitments to wider society. Among its triumphs was a successful legal case against the British National party, establishing that its membership criteria, which excluded people on the basis of race, was unlawful.

Unions warn that cuts mean the commission's status as a UN-accredited "national human rights institution" is under threat. Mark Serwotka, general secretary of the Public and Commercial Services union, said: "Rather than helping to make our society more equal, these cuts risk setting us back decades and abandoning people who need help.

"Investing in equality is not 'red tape', it's absolutely necessary in recognition of the fact that, after years of fighting, sections of our communities still face discrimination and hatred."

Mark Hammond, the EHRC's chief executive, said on Tuesday: "The commission has recently agreed a new three-year strategy and today publishes plans for its work for the next 12 months. We will continue to deliver high-impact work on protecting people from discrimination and human rights abuses.

On Monday, the commission said that a detailed evaluation of the controversial 2010 spending review showed the government had not "fully grasped … the requirements of public sector equality duties". The Home Office said a review was needed to see whether "the duty is operating as intended".