A Home Office strategy to tackle non-violent extremism has been discreetly shelved after Liberal Democrats in the coalition government blocked the proposals as too hardline and an affront to civil liberties.

A leaked copy of the 28-page report, seen by the Observer, reveals a series of measures designed to counter extremism, including reduced benefits for people who struggle to speak English, training for Jobcentre Plus staff so that they can spy on people considered vulnerable to extremism, and banning individuals from entering the UK if they are judged to have “undermined British values”.

It is understood that senior Lib Dems refused to approve the strategy, despite promises by the Home Office that it would be published before the general election.

The quiet burying of the heavily-trailed strategy means that there has been no official strategy to counter non-violent extremism during the five-year term of the coalition government, the issue emerging as the final major row between the Tories and lLb-Dems.

Since 2012, more than 600 Britons have travelled to fight in Syria or Iraq. A source close to the drawing up of the strategy said: “We are not properly combatting the language of extremism. No wonder more than 600 foreign fighters have left Britain. It is desperate that there has not been a strategy to counter this radicalisation.”

The strategy document, A Stronger Britain, Built on our Values, includes a number of proposals to take tougher action against individuals propagating extremism, broadly defined as “vocal or active opposition to British values”.

Among the proposals is a pledge to refuse applications by refugees judged to have breached a new “carefully defined legal threshold” of extremism. Instead of being granted asylum, refugees would be given “a new form of restrictive leave to remain”, under which they would have to report regularly to the Home Office and face restricted access to employment and education.

Marked “draft” and with a planned foreword by the home secretary, Theresa May – yet to be written – the strategy proposes banning people from entering the UK if they are seen to have “undermined British values” abroad. Last year 19 “hate preachers” were banned from entering Britain. Under the new strategy, a far higher number of individuals would be likely to face exclusion.

In addition, the government’s Knowledge of Life in the UK tests would be made more difficult. Other reviews to be introduced, according to the draft, include re-examining the level of training for imams in the UK, alongside a recommendation that imams should ideally be recruited from Britain instead of overseas. Controversial elements include the proposed introduction of penalties through the benefits system if people cannot speak English adequately.

The draft acknowledges that many British Muslims have been alienated by elements of UK foreign policy, recommending that the government should officially start explaining its foreign policy to “better explain the good we do”. Other initiatives include more investment to encourage young people to become military cadets and an independent review into sharia law in the UK, alongside a promise to “take swift action to tackle any abuses”.

The strategy also promises new posts in prisons to deal with extremism among inmates and more effective whistleblowing and complaints procedures in schools, making it easier for teachers to air concerns over pupils. Colleges would be banned from sponsoring visa applications if applicants promoted extremist views, and would face consequences for “knowingly or unknowingly” hosting extremist speakers without challenging their views, according to the plans.

The document makes frequent reference to the Tell Mama hotline, the pioneering initiative for recording Islamophobic crimes and incidents, which has been praised by ministers, for monitoring anti-Muslim sentiment in the UK. However, the Observer understands that government funding for the hotline appears not to have been renewed.

The strategy’s publication was delayed for months amid arguments about how strongly worded it should be. Sources said it was due to be unveiled at a speech last month by May at the Royal Institution of Chartered Surveyors in London.

In her speech the home secretary said: “The starting point of the new strategy is the emphatic rejection of the misconception that in a liberal democracy like Britain, ‘anything goes’, the belief that living in a society like ours means there aren’t really any fundamental rules or norms. Instead the foundation stone of our new strategy is the proud promotion of British values.”