“Friends”, said Iain Duncan Smith, introducing the Welfare Benefits Uprating Bill in the House of Commons last week, this Bill is about the renewal of “a principled welfare state based on affordability, integrity and fairness”. In truth it is about the creation of a system that meets none of these important principles, nor the founding principles of the welfare state, including universality and equality. Far from slaying Beveridge’s Giant Want, this miserable measure restricting nearly all benefits to a 1 per cent rise annually for three years gives poverty a major ‘hand-up’ (to employ current Tory terminology).

The long-term neglect of social housing, economy-driven staff shortages and a privatising reorganisation in the NHS, Gove’s fast-track private and voluntary inroads into state school education, the introduction of fees in higher education – these represent a fundamental shift away from the ideals and policies that made the welfare state. New Labour in government was responsible for these shifts in direction. Liam Byrne, Labour’s front-bench spokesperson in the Commons debate, conspicuously failed to challenge the coalition government’s unprecedented refusal to uprate social security benefits for the out-of-work in line with inflation. This refusal strikes at the central pillar of the welfare state. Byrne’s abject failure in the debate to speak up for the principle that it is the state’s responsibility to provide properly for unemployed workers and their families signals the end of his party’s commitment to a welfare state that is being eroded by the coalition.

‘Debate’ is the wrong word. Duncan Smith and Byrne began slugging it out, like prize-fighters, trading partisan arguments, statistics and insults which are intended to be their parties’ electoral body blows.

Thud!: This strivers’ tax hits working families instead of finding them work (Byrne).

Bam!: Labour’s profligacy and benefit bribery trapped millions of people in dependency (IDS).

Thud!: The Tories are giving the rich a huge tax cut while withdrawing benefits from the working poor (Byrne).

Ho ho!: The richest pay more in tax now than in any single year of the Labour government (IDS ).

Labour and minority party MPs made good Byrne’s omissions in the debate that followed. They gave concrete evidence that dispels the workshy myths that the Tories exploit to justify the Bill and illustrated the distress and upheaval that its package of cuts will cause. Charities and organisations such as the Children’s Society, Barnardo’s, the Child Poverty Action Group (CPAG) and Citizen’s Advice Bureau gave all MPs expert evidence on the realities of life for those who depend on social security and the damaging consequences of the bill. Even the government’s own assessment showed that the bill’s measures will hit the poorest, lone parents, the disabled and women and children, hardest.

Sod evidence! The Tories in return belted out the very same workshy and dependency myths with renewed fervour – do they really believe this nonsense or must they affirm it so strongly to convince themselves? – and laughed and jeered at Labour MPs who cited the Joseph Rowntree Foundation research which proved them wrong (see Deborah Padfield's detailed exploration of the welfare reforms and their likely impact).

George Osborne of course knows his charge that the workshy sleep behind drawn blinds (blinds indeed!) while ‘strivers’ go to work is a wicked calumny on the great majority of unemployed people. But he also knows that that it plays to popular belief that social security for the unemployed is the preserve of layabouts living a life of Riley and is increasingly resented by those in work. Osborne, a peculiar merger of smarmy Blackadder and Baldrick, thus conceived of a cunning plan to force Labour to choose between keeping the faith or reinforcing their image as the party of scroungers. Thus the wretched upratings bill, or as Andrew Rawnsley put it, the Welfare (Make Labour Look Like the Party for Skiving Fat Slobs) bill.

However, as the bill applies the 1 per cent cap to benefits for the working poor as well as for the workless, he and Duncan Smith gave the Labour front bench the opportunity to wax outraged over the plight of working families while evading his trap. In one sense, then, the cunning plan failed. It has caused widespread revulsion within the political class and among their Lib Dem allies (Sarah Teather rejected it in a dignified and profound speech in the debate). But the damage is done at a popular level. Tory politicians will clearly hammer the deceitful message home and will pursue further the misleading charge that benefits are rising faster than earnings and they must therefore restore equity and ensure that work pays more than idleness.

The Conservative party is persevering with this charge. Their figures are accurate. Since 2007 benefits have increased by 20 per cent as against 10 per cent in earnings. But the figures add up to one big lie and obscure a greater truth. The time span for the figures has been chosen to accentuate the difference but they are merely percentages. In actual money terms, the percentage rises in unemployment benefits start from a lower base and do not outstrip earnings.

The United Kingdom has in fact one of the meanest safety nets in Europe and out-of-work benefits are historically set low specifically – and even spitefully, as they were under a device known as the ‘wage stop’ – to preserve the principle that it doesn’t pay more to be on benefit than in work. They have also become lower over time. As the Child Poverty Action Group told MPs, unemployment benefit in 1979 was 22 per cent of average earnings; today it is just 15 per cent.

In the midst of the sound and fury is a fierce battle over the fate of the Labour government’s tax credits scheme which millions of people have been able to claim up the income scale to families with earnings of £70,000 a year. The Tories regard the work and child tax credits as an immense and extravagant electoral bribe and an insidious attempt by Labour to extend the ‘dependency’ state.

For the past two years the government has frozen them. They are to be replaced along with other welfare benefits by IDS’s universal credit scheme which comes with two promises – one, that no existing claimants will lose in cash terms from the change, and two, that it will always pay to be in work. The unspoken purpose of the uprating bill is to abolish tax credits and to restrict rises in them and other benefits so that by the time universal credit comes in it will be set at a much lower level than it would be now.

Quite how this bill will play electorally is hard to judge. Obviously the Tories think they are on a winner. They seek to turn the lower paid against the unemployed. But the division between people in and out of work is not as rigid as they seem to assume. Perhaps attitudes to worklessness will change as a result of the lived experience of the churning that goes on in the labour market – with people losing and finding work and coming on and going off benefit. Still to come are other changes, to council tax benefit, the full effects of the housing benefit cuts, including the ‘bedroom tax’ on spare rooms in rented accommodation, and the withdrawal of more public services. Awareness of the further poverty, misery, dislocation and homelessness they will cause could reverse the public mood of resentment over benefits.

Moreover, millions of comparative well-off people are going to lose out as child benefit and tax credits are cut back still further. Tax credits are far more extensive than is generally realised, reaching over six million people – among them the teachers, nurses and soldiers, ‘strivers’ all, that the Children’s Society has identified.

Clearly, the worldwide financial crisis means that the old welfare state cannot survive in the form that we knew, and it was never as fair, effective and accessible as it should have been. The alternative that the Tories and to some degree their coalition partners propose is an austerity-driven means-tested public welfare system, a shift from benefits to tax allowances for the better off, public services dominated by unaccountable private companies and a low-income economy for most workers with fewer rights at work and higher rents at home. For them Cameron’s ‘global race’ will be a race to the bottom.

The welfare state may be over and some of its latest manifestations have become part of the problem. New Labour ducked the structural challenges like inadequate and falling wages that the neo-liberal economy brings by way of tax credits and other benefits.

I would argue that, while the old welfare state is no longer tenable, all is not lost. There is an alternative. The principles and ambitions the welfare state sought to bring into effect can still serve as the guiding principles for the future. They could form part of an immediate policy prescription to bring the country out of austerity measures which, by making reductions in the incomes of the poorest, only serve to depress the demand that the economy needs. Labour are right in making employment the centre of their response, but they need to take and articulate the comprehensive and ‘connected’ approach to welfare that was the mark of the Beveridge reforms. (Nick Pearce, director of the centre-left think tank IPPR, argues here that the debate around the bill provides a clear opportunity to renew Beveridge's legacy.)

The party must develop the idea of the ‘living wage’ beyond its voluntary pupal and aspirational stage into active public policy. The living wage could replace a tax credit system that acts as a gross and leaky prop for the failure of private companies to deliver decent wages while many of them avoid paying taxes. Housing is a key resource for the good society. Rent controls could save billions in housing benefits that subsidise absurdly high private rents that Mrs Thatcher made possible; a major programme of social house building could boost the economy, assist in bringing down rent levels and reduce homelessness.

Universal child benefit is a lynchpin of a progressive welfare system. It ensures that no family falls through the net; it provides some equity between families with children and childless households; it supplements work incomes to allow for the additional needs of children, in terms of living space and life chances; and along with other benefits, contributes to solidarity and a common social interest.

The Tories are promoting a divided state and dragging the Lib Dems behind them. It is up to Labour and progressive parties – perhaps even rehabilitated Lib Dems – to frame alternatives that could unite people rather than divide them. Civil society organisations have a part to play too. The Beveridge reforms may be dead. The principles must live on.