Cuts to benefit entitlements make it less likely unemployed people will find a job, a government-backed employment project has found, undermining politicians’ claims that docking welfare payments acts as an incentive to work.

A scheme run by Oxford city council and the Department for Work and Pensions (DWP) found that the odds of long-term jobless claimants finding work reduced by 2% for every pound of income lost through housing benefit cuts.

The findings emerged in an evaluation of a one-year EU-funded project aimed at helping unemployed claimants cope with cuts to their housing benefit as a result of the benefit cap, local housing allowance restrictions, and the bedroom tax.

The evaluation suggests cuts that push low-income claimants further into poverty, housing insecurity and debt, coupled with a lack of affordable childcare, create barriers and stresses that can inhibit their ability to find work.

The government insists that applying benefit caps to workless claimants acts as a “powerful incentive” for them get a job because they gain exemption from the cap’s often severe financial penalties if they can claim working tax credits.

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The DWP said it disagreed with the Oxford report’s conclusion. Its own national evaluation, published in 2014, found that capped claimants were 41% more likely to find work than households whose incomes were below the cap, and that 40% of capped households escaped the penalty by moving into work.

“Our welfare reforms are incentivising work,” a DWP spokesperson said.

However, the Oxford project – which found by contrast that just 27% of capped households moved into work – concluded that debt and financial hardship experienced by claimants who lost hundreds of pounds a month in benefits left them further away from accessing the job market.

“Conventional wisdom suggests that taking money off benefit claimants (eg by sanctions or cutting benefit rates) acts as a financial incentive to get a job. Our analysis says that the opposite is in fact true, at least for this project cohort,” the project evaluation report says.

“Higher benefit losses may correlate with higher rent and larger families, and financial hardship; as childcare and debt are established barriers to work, it is perhaps unsurprising that customers with higher benefit losses are less rather than more likely to get into or back into work.”

The evaluation suggests that where the scheme was successful in getting claimants into work the key factors were investment in tailored support in skills, training and work preparation, together with financial support to prevent rent arrears.

Paul Wilding, Oxford city council’s revenues and benefits programme manager, said: “The benefit cap together with the right [employment] support is actually a useful measure. But the benefit cap without that support is a disaster.”

Mahima Mitra, an Oxford University researcher who worked on the project evaluation, said financial hardship meant some claimants would concentrate on everyday survival rather than looking for work. “You are worrying more about the day-to-day. Your main priority is to ensure you can pay [rent] and buy food. Finding work is far down the list.”

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Although getting a job is the main way of avoiding the benefit cap, the project found that some parents affected by the cap found it difficult to move into work because of lack of affordable childcare. Expensive housing, health problems, lack of IT skills and access to digital technology were also barriers to work.

The benefit cap currently restricts benefit payments for working-age households to £500 a week, though claimants can claim exemption if they work and claim working tax credit, or are in receipt of some disability benefits. The cap will be lowered to £442 a week in London and £385 elsewhere later this year.

Areas with high rents such as Oxford – recently identified as the least affordable place to live in the UK – are likely to see proportionately more jobless households claiming housing benefit being hit by the cap. A quarter of participants in the Oxford project faced benefit cap losses of more than £200 a month.

Approximately 146 participants were subject to the benefit cap during the year. Of the 81 who moved off the cap, 40 moved on to working tax credit, suggesting they had found work or worked more hours. Oxford’s unemployment rate is at a record low of 0.6%, with more job vacancies than people on the dole.

Nationally, official government estimates indicate that 120,000 households will be hit by the lower cap level, losing an average of £63 a week. Around 330,000 children will be affected, especially in the south of England and in some northern cities. Many of these will be pitched into poverty.

Oxford has seen 232 households hit by the benefit cap since 2013, but this number is likely to double when the lower cap rates are introduced in the autumn, stoking fears of a rise in evictions and homelessness. At the same time the DWP has cut the council’s discretionary housing payment budget – temporary grants to help capped tenants stave off rent arrears until they find work – by 44%.

Of the 230 Oxford residents involved in the project, which ran for 12 months until June 2015, just over a quarter found sustainable work or increased hours of work, with 85% still in work by the end of the scheme.

