Revealed: The £1.5billion we waste on welfare in Britain every year

Britain is a decade behind other countries on welfare reform and is wasting up to £1.5billion a year on benefit payments, a report warns today.

Researchers say that handing over responsibility for back-to-work schemes to private companies and charities could save the taxpayer massive sums.

In some parts of the world, welfare payments have been slashed by 80 per cent in just a few years.

But the piecemeal approach to contracting out being taken by the Government is potentially risky and has led to fraud in some countries, the report says.

Gordon Brown is facing conflict with some Labour MPs and unions over plans to pay private firms by results for getting the jobless back to work.

Up to 40 backbenchers are understood to be demanding a rethink of the proposals.

The report, from the centre-Right think-tank Policy Exchange, says that unemployment and incapacity benefit rates in the UK have been largely static for Labour's decade in power.

Unemployment varied between 1.4million and 1.7million between November 1999 and May 2007 and incapacity benefit claims have been stuck between 2.3million and 2.5million over the same period.

It says that contracting out employment services - the central and controversial recommendation of a review headed by Government adviser David Freud - could slash unemployment and save the taxpayer over £1billion a year.

But the study found that some companies exploit "success fees" which are paid when they find someone a job.

They then deliberately keep people on benefits until they pass a threshold that would guarantee higher payments.

The research, which looks at five countries which have contracted out welfare payments - Australia, the U.S, Germany, the Netherlands and Denmark - concludes that the advantages of deploying the private and voluntary sectors to get people into work greatly outweigh any negative effects.

In the U.S. state of Wisconsin, welfare payments fell by 80 per cent over three years.

If similar changes in the UK achieved only a quarter of this change, the annual budget for incapacity benefit claimants would be cut by £1billion, and the cost of benefits for lone parents with children over seven by around £300million.

If the UK matched the 50 per cent drop in job placement costs achieved in Australia, the cost of operating the welfare system would be cut by £250million.

Germany's jobless count fell by one million in the two years after it started to reform its welfare state.

And both Denmark and the Netherlands have been far more successful in getting lone parents and the disabled back to work than other EU countries.

Dr Oliver Marc Hartwich, Policy Exchange's chief economist, said: "Implementing a successful programme of contracting out will require courage and skill.

"It offers a good solution if we are going to ever see a substantial fall in the numbers unemployed or on incapacity benefit."

Shadow work and pensions spokesman Chris Grayling said the Tories are committed to introducing Mr Freud's reforms in full.

"It's clear that Britain desperately needs the kind of radical welfare reform introduced in other countries," he added.

"Worse still, international lessons show the kind of tinkering we are seeing can do more harm than good."

A spokesman for James Purnell, the Secretary of State for Work and Pensions, insisted the report is "very encouraging and shows that contracting out works".

"The private and voluntary sector already plays a role in delivering our back-to-work programmes and their involvement is here to stay and set to grow," she said.