Council homes for life to be replaced by tenancies lasting as little as five years based on need and income • NB: this article was published on 3 August 2010

An end to lifetime council tenancies was signalled today by David Cameron as he warned the coming public spending cuts will not be restored when the economy recovers.

Cameron said he wanted to see fixed terms for all new council and housing association tenancies lasting as little as five years to help increase social mobility.

The prime minister admitted that "not everyone will support this and there will be quite a big argument". Speaking in Birmingham, he said: "There is a question mark about whether, in future, we should be asking when you are given a council home, is it for a fixed period? Because maybe in five or 10 years you will be doing a different job and be better paid and you won't need that home, you will be able to go into the private sector."

A consultation paper, due to be published as early as tomorrow, will say the new short-term tenure would be for local councils to implement, but would involve regular reviews of tenancies to see if the council tenant still needed such a large property or had sufficient income to shift to the private sector.

At present council tenants have secure tenancy for life. Housing association tenants have secure tenancy for life after a probationary year. Council tenants have the right to hand the property over to their children, whereas housing association tenants do not.

The communities department estimates that it costs each taxpayer £35 a week to keep people in affordable homes, and it is argued the tenancy for life is an inefficient use of scarce resources.

Under the government's proposals council tenants could be forced to downsize. A total of 234,000 households in the social tenant sector are overcrowded while 456,000 are under-occupied, meaning people have more than one extra spare room, according to official figures.

The government has already announced separate plans to cut housing benefit.

Defending the reforms that have proved too politically explosive for Labour housing ministers to implement, the coalition's housing minister, Grant Shapps, said last night: "It is quite clear that the real losers from the current system are the 1.8m people on council house waiting lists who the current arrangements do not help.

"It is time to consider whether our affordable housing system can be better used and whether one of the benefits would be greater social mobility. Any benefits from these changes might take many years, but it does not mean we should shy away from doing something. This will have no impact on existing council or housing association tenants."

Shapps has been holding private talks with key housing groups to persuade them to back the reforms.

Critics of the proposed reforms say it could disincentivise the unemployed to seek well-paid work as they might lose their tenancy as result. There are also fears that it would increase the chances of council estates becoming ghettos of the workless poor.

The homeless charity Shelter said tonight: "We do not believe the big question in housing policy is security of tenure for new tenants. The prime minister has sidestepped the fundamental cause of our housing crisis – the desperate lack of affordable housing supply."

Helen Williams, assistant director at the National Housing Federation, said: "There is a case for looking at what is offered to new tenants, as a way to seeing if over time social housing could help more people."

Cameron today urged the public to recognise that the deficit was a moral issue and suggested public spending would not be restored to its current levels when the economy improves.

"Should we cut things now and then go back later and try and restore them?" Cameron asked. "I think we should try to avoid that approach … people should open their minds and find new ways of doing more for less. We're going to have to change the way we work. How can we do things differently and better to give the value for money?"

With the Spending review due to be published in October, he urged people to recognise there would be light at the end of the tunnel, and that "it is not all doom and gloom". Cuts of 25% – the equivalent of a 5% cut every year – was what many businesses and families were facing with their own budgets.

He said his aim was to tackle the big ticket items like pensions public sector pay, and welfare before tackling smaller budgets.