Labour will move to protect itself from the politically damaging charge that it is soft on welfare claimants, by proposing that every adult aged over 25 and out of work for more than two years should be obliged to take up a government-provided job for six months, or lose benefits.

The "compulsory work or lose benefits" announcement by the shadow chancellor, Ed Balls, and the shadow work and pensions secretary, Liam Byrne, comes ahead of what threatens to be a fraught second reading debate on Tuesday over Labour's refusal to back a government bill restricting increases in benefits and tax credits to 1% a year for the next three years – which is likely to represent a 4% cut in real terms.

Iain Duncan Smith, the work and pensions secretary, has been campaigning this week on Labour's failure to take tough decisions on welfare, to tackle the deficit. The coalition cites Institute for Fiscal Studies figures showing in-work earnings growing less quickly than prices since 2007, while out-of-work benefits have been rising faster.

In polling, Labour trails badly on welfare, especially among swing voters.

The Labour scheme would initially apply to 129,400 adults over the age of 25 who have been out of work for 24 months or more. The scheme would apply to those on jobseeker's allowance (JSA), but not disabled people on employment support allowance (ESA). All those on the scheme would be paid the minimum wage.

There has been a rise of 88% in the number of long-term unemployed since the same month last year and a rise of 146% in the past two years.

Labour says the £1bn cost of subsidising the jobs, mainly in the private sector, would come from reducing tax relief on pension contributions for people earning more than £150,000 a year to 20%, instead of the 45% proposed by the government in the autumn statement.

The Department for Work and Pensions has been testing a scheme to get the long-term unemployed – those in pilot areas claiming JSA for more than two years – back to work. It has offered them six months of intensive support from a dedicated Jobcentre Plus adviser, or a place on a community action programme involving 30 hours' work a week for six months.

Labour's new job guarantee scheme for those aged over 25 is in addition to an existing Labour "work or lose benefits" policy targeted at 18- to 24-year-olds out of work for a year or more. That scheme, announced in March last year, would be funded by a tax on bankers' bonuses.

The schemes are modelled on the future jobs fund of the previous Labour government, and have been in preparation by the shadow employment minister, Stephen Timms, for the past year. A claimant who refused a job offer would lose 13 weeks' benefit, and a second refusal would lead to 26 weeks' loss of benefits.

Balls said: "A one nation approach to welfare reform means government has a responsibility to help people into work and support for those who cannot, but those who can work must be required to take up jobs or lose benefits as a result – no ifs or buts.

"Britain needs welfare reform that is tough, fair and that works, not divisive, nasty and misleading smears from an out of touch and failing government.

"Day after day, we see Tory and Lib Dem ministers claim they are targeting the workshy and benefit 'scroungers'. But it's no wonder even cabinet ministers have told the newspapers they are uncomfortable with these smears. Because the truth is very different."

He also defended Labour's decision to support an increase of benefits in line with inflation, saying: "Two thirds of the people who will be hit by David Cameron's real-terms cuts to tax credits and benefits are in work."

He also asserted that the so-called political trap set by the chancellor, George Osborne, for Labour would end up backfiring on Tory MPs in marginal seats.

"Of course we need spending cuts and tax rises to get the deficit down but, with the flatlining economy sending borrowing up by 10% so far this financial year, it's clearer than ever that you cannot get the deficit down without a plan for jobs and growth which works.

"Labour supports the principle of a benefits cap but this government's crude 'one size fits all' cap – with the same level in London as the rest of the country – will simply lead to taxpayers funding the cost of rising homelessness as families living in high-cost areas are turfed out of their homes."