Labour leadership hopeful Liz Kendall has set out radical plans to devolve control over welfare, housing, health and transport to local government as she demands that her party breaks its longstanding habit of hoarding power at the centre.

Writing in the Observer, Kendall accuses the party under Ed Miliband of being too timid on devolution, and of allowing the Tories to steal Labour’s clothes by pushing ahead with plans for a “northern powerhouse” and more local powers to run NHS services.

Her intervention comes as Yvette Cooper, a former cabinet minister and one of her rivals to succeed Miliband, prepares a speech in which she will tell party members not to choose “the new but untested and naive option”. This will be seen as a dig at Kendall, who entered parliament in 2010 and has never held government office, or a senior shadow cabinet post, though she is shadow care minister.

Kendall, who has been billed as the New Labour choice, is seeking to shake off that tag and distance herself from the last Labour government’s record on devolution, by suggesting that under Tony Blair and Gordon Brown the party exercised tight control from the centre.

“Old Labour favoured top-down control from Whitehall,” she says. “New Labour used managerialism and performance indicators to run things from the centre. We achieved great things when we were in government, but the world has changed.”

The same tendency asserted itself under Miliband, Kendall suggests, when the party developed proposals for sweeping devolution but failed to promote them. “It is true that devolution was part of Labour’s manifesto, but we were too timid to really believe in it, or practise it. We were too paternalistic and wouldn’t put our trust in people. We held on to an urge to control that belongs to the past.”

Among her ideas is a plan to promote more local employment services, which could adapt their approaches to fit local economic circumstances and the needs of individual unemployed people.

Before the election, Labour developed a scheme to devolve housing budgets from Whitehall to local government. Senior figures in the party believe Kendall may want to revive an idea under which local authorities that develop imaginative housebuilding schemes would be given more housing funds from the centre and more power to borrow.

Under this plan, which was developed by the independent IPPR thinktank, local authorities would be given direct control of parts of the housing budget, in the hope that they would provide new affordable housing for more local people, thereby reducing the crippling housing benefit bill.

Kendall, who says she has the necessary backing of 35 Labour MPs to get on the election leadership ballot paper, is competing against Cooper, shadow health secretary Andy Burnham and the shadow international development secretary, Mary Creagh.

Lord Falconer, the former lord chancellor and a friend of Blair’s, explained last night why he will back Burnham rather than the presumed candidate of the Blairites, Kendall. “For me, the reality is that I believe the person who leads the Labour party has got to lead it in a changed and new direction. And that person has got to be able to galvanise and unite the Labour party. Andy can do that.

“I always thought Andy was the right person. He has the combination of courage and directness, and he is a unifying force, and a very different figure from what has come before. He is very much the Labour candidate but with a reach into the electorate as a whole.”

In the Observer, Kendall says: “Devolution goes hand in hand with our sense of identity, belonging and pride about where we live. Devolution to Scotland, Wales and Northern Ireland is accelerating. We must support England’s right to its own voice, too. But we don’t want some self-serving Tory technical fix in Westminster for English MPs. Labour must be the champion of a more devolved UK, including within England.

“This means working with our cities, towns and counties to help them take on more power and responsibility over welfare, housing, health, education, transport and economic growth.”

Meanwhile, Cooper said that she believed the principle of a cap on benefit claims was correct but Labour should not “sign up lock, stock and barrel to Iain Duncan Smith’s plans”.

She said: “People should be working if they can. I’ve always worked long hours and always believed it was right to work hard and support your family. But I did have 12 months 20 years ago when I was too ill to work. I hated it and was desperate to get back to work, but I couldn’t. And I had to claim sickness benefit and housing benefit to pay the bills and the rent. So I will always support strong rules on contribution, on expecting people to work, including compulsory jobs. But I will never slag off people who are on benefits because they can’t work as ‘workshy’ or ‘scroungers’. That’s what Tories do. Not Labour.”