The welfare minister, Lord Freud, has been accused of "rowing away from the principle of welfare" after he urged local authorities to invest money in food banks, saying that it was "absolutely appropriate" that charities provided free food parcels for people who could not afford groceries.

Freud made his comments at a conference on welfare reform, after being asked by an audience member whether it was sustainable that working people were increasingly turning to food banks and hardship funds to get by.

He said society had had a "terrible economic thump" and had to find ways of working through it, and food banks, which provide in-kind support in the form of food parcels, were "actually a very interesting way of doing it".

He added: "I think that the local authorities and the local districts may very well look at ramping up their support in kind in that way, depending on where they are.

"I think that is one of the things that they are looking at and I think it's absolutely appropriate that they do so."

A Department for Work and Pensions (DWP) spokesman said Freud was not making "a call to fund food banks" but was urging councils who provided in-kind support through local welfare assistance schemes to use food banks "as a means of delivering support in this way if that was what worked best for them".

Niall Cooper, national co-ordinator of the charity Church Action on Poverty, said Freud's comments suggested the minister was washing his hands of the problem. "It's a government rowing away from the principle of welfare: rather than the state providing the safety net it is [prepared to rely on] voluntarism and in-kind support.

"Where are we as a society that people in work are having to turn to food banks? That's a big question but it does not feel like one the government wants to answer."

All 152 councils in England have set up welfare assistance schemes to replace the crisis loan and community care grant elements of the old social fund, which were until April provided by the DWP.

The majority of schemes offer only in-kind support or food vouchers rather than cash asisistance, and a number work in partnership with food banks. Almost two-thirds of council welfare schemes stipulate that working people are not eligible for local welfare help. One council, Nottinghamshire, is proposing to close its scheme next April.

Some local authorities have accused the Department for Work and Pensions of shifting costs on to councils by referring claimants to local welfare assistance schemes instead of offering them a short-term loan to tide them over until their first benefit payment comes through.

According to reports in Local Government Chronicle, Freud said the government's universal credit system would address the problem of working people having to use food banks because it would provide "flexible support for people who are in work".

Chris Mould, executive chair of the Trussell Trust food bank, said it was good news that Freud had recognised the important role of food banks. But the real issue was that low pay meant the economy and employers were effectively being subsidised by food banks.

"That's not acceptable," he said. "No one should start to assume that this is part of the way that the economy should operate in future."

Freud has insisted that food banks "were absolutely not part of our welfare system" and repeatedly claimed that there is no robust evidence of a causal link between welfare reform and the rise in food bank use.

He caused controversy in July when he suggested that the rise in food banks was triggered by people seeking out food because it was free "and by definition there is an almost infinite demand for a free good".