'2m should not receive benefits'

David Freud suggested that the "real figure" of people with illnesses and disabilities which make them unable to work is closer to the 700,000 on the benefit in the 1980s than the 2.64 million now claiming a total of more than £12 billion a year.

Mr Freud's report on welfare-to-work last year was highly influential on the reforms set out by Work and Pensions Secretary James Purnell on Monday, which could see private firms paid "bounties" to get claimants off Incapacity Benefit and into jobs.

The banker said that the medical checks required to claim IB - worth up to £81.35 a week - were "ludicrous" and could be costing the country billions of pounds.

He said he believed Prime Minister Gordon Brown was ready to press ahead with the biggest shake-up of the welfare state for 50 years, and thought Mr Purnell would tackle the problem with "much more single minded ferocity" than his predecessor Peter Hain, who quit last week.

In an interview with the Daily Telegraph, Mr Freud suggested that fewer than one third of those claiming Incapacity Benefit were truly entitled to it, while tens of thousands were actively defrauding the system by working illegally while receiving the benefit.

"When the whole rot started in the 1980s we had 700,000," he said. "I suspect that's much closer to the real figure than the one we've got now."

He estimated that "5% to 7%" of claimants - between 132,000 and 185,000 people - were working while receiving benefit.

Mr Freud was scathing about the current procedure for determining eligibility for Incapacity Benefit.

"It's ludicrous that the disability tests are done by people's own GPs - they've got a classic conflict of interest and they're frightened of legal action," he said, adding: "If you want a recipe for getting people onto IB we've got it," he said.