Now that we face a recession we need an effective welfare state with a kindly face, but the government’s failure to reform the welfare system during the good times means that perverse welfare incentives are likely to deepen the economic downturn.

Families that work hard and pay their taxes are the backbone of society. As a people we have always had a sense of solidarity and this obligation has been accepted gladly, but poverty is not something that just happens. It is related to work effort, as the government report, Households Below Average Incomes, shows.

If neither half of a couple works, the risk of falling below the poverty line is 68%. If one works full-time, the risk falls to 20%. If one works full-time and the other part-time, the risk is only 3%. In other words, few people are poor if they work full-time.

The government has repeatedly said that work is the best route out of poverty and yet its policies have two perverse effects.

First, its flagship policy, working tax credit, discourages full-time work by subsidising individuals who work only part-time and, second, it imposes a penalty on couples raising children.

Many people receive more in benefits and tax credits than they earn after allowing for income tax and National Insurance. In the current financial year, 1.1m single parents are receiving net state benefits in excess of their earnings. That is 58% of the total, compared with only 11% of couples.

For example, a single parent with two children under 11, not paying for childcare and earning £100 a week, would take home £317.52. Comparing state benefits (all cash benefits, state pensions and tax credits) with personal taxes (income tax, National Insurance and council tax) in 2008-9, 45% of families are receiving more than they pay. In 1979 the figure was 35%.

Worst of all, low-income couples with children – precisely those who can make ends meet only by combining their efforts – are discouraged from living together. According to the Institute for Fiscal Studies, if a single mother earning £10,000 was contemplating living with a boyfriend earning £25,000, the pair would be £5,473 per year better off if they told the government they lived separately – a bonus of 22% for doing the wrong thing.

Many single parents live with a boyfriend or girlfriend despite such financial pressures. A survey for the work and pensions department in 2004 found that 23% gave up benefits to “re-partner”. Their decision to live together was a triumph of romance over economics and we can conjecture that, without powerful government incentives to live separately, more people would marry.

We now have a big problem with welfare dependency. In 1960 all social security benefits cost 5.5% of GDP. In 2006-7 the cost of “social protection” was 13.4% of GDP. The solution is not to harden our hearts and invoke a crackdown. It is to put the welfare state on a new footing: reciprocity.

Working tax credit allows people who work as few as 16 hours a week to have their wages made up to match the earnings of people who have put in a full 35 hours. What most people intuitively feel about welfare is not that nobody should be poor, but rather that nobody who has worked hard should be poor.

If working tax credit were abolished and replaced by a supplement payable only to claimants who had worked for 35 hours a week for 47 weeks a year, the benefit system would reward hard work.

What about raising children? Figures from the Organisation for Economic Cooperation and Development show that in most countries the importance of both parents sharing the work of bringing up children is recognised by the tax system.

In France an adult counts as one unit and a child half a unit so a married couple with two children would be able to divide their income between three units. How would such a system work in Britain?

The British personal tax allowance is £6,035. Imagine that the man works 30 hours a week, cares for the two children one day a week and earns £20,000, while his wife earns £10,000 and cares for the children for four days. The total of £30,000 would be divided into three units of £10,000 each, benefiting from a tax allowance of £6,035.

Their tax liability would be the same whether the husband worked full-time and the wife was a full-time carer, or if they reversed roles. Under the current system the wife’s personal allowance is unused if she has no earnings.

A welfare state to protect all of us from privation remains as necessary as ever, but our system is in urgent need of an overhaul to ensure that every family is financially independent and able to put something back.

David Green is director of Civitas and has just completed Individualists Who Cooperate: Education and Welfare Reform Befitting a Free People, soon to be published by Civitas

Times Recommends

• It’s not just about Iraq, it’s about Blair’s style
• You can’t rank hospitals like football teams
• Minarets are not an essential part of Islam