Radical changes to the welfare state, requiring claimants to look for work in order to continue receiving benefit, will be announced by the Government on Monday.

James Purnell, the Work and Pensions Secretary, has been given the go-ahead by Gordon Brown to implement all the main proposals of the Freud report, which was originally commissioned by Tony Blair and which will be seen as heralding a significant privatisation of the welfare system.

The Times revealed two weeks ago that the proposals include plans to force unemployed people to undertake community service in return for receiving benefit as a way of preventing them working in the “black economy”. But Mr Purnell, who will entrench his reputation as the Cabinet’s leading Blairite moderniser, will pave the way for massive involvement of the private and voluntary sectors in the provision of welfare.

From being a sceptic over the Freud report during his last months as Chancellor, and opposing parts of it, Mr Brown has become an enthusiastic advocate and has given Mr Purnell full rein to implement it.

Under the plan, businesses could bid to run programmes including welfare-to-work schemes and projects to rehabilitate former offenders. Companies will be encouraged to come up with welfare solutions, rather than wait to be asked, a reversal of current rules which stipulate that the Government decides which services to put out to tender.

The Prime Minister has approved the release of the plans to tackle the dependency culture just four days before the Glasgow East by-election. There will be a Bill in the next session of Parliament.

Under the plans there will be a new focus on long-term mentoring to tackle the problem of repeat benefit claimants. Companies, having helped them off the dole with advice and support, will try to encourage them to progress to higher-paid jobs rather than returning to benefits.

People who do not cooperate in looking for a job could have their benefits stopped for six months, and sick and disabled people will be expected to work if they are able to do so. Lone parents will be required to look for work when their youngest child reaches the age of 7, rather than 16.

Companies that are successful in helping claimants to find and stay in work will have greater rewards and there will be even higher payments based on sustaining customers in employment for as long as three years.

The moves will be presented as a serious attempt by Labour to shrink the role of the State and improve service delivery. It opens the way for a potential multibillion-pound market for private companies and voluntary groups. They already have a £1.8 billion share of the market, compared with £600 million in 2001.

Mr Purnell said: “There will be a very clear expectation that if there is work there people should take it, and sanctions to make sure that if they do not there will be consequences.” On the “work-for-dole” plan he said: “You have to create a system where people who are working illegally don’t have the time to do that.”

The minister has been holding regular meetings with Labour MPs to smooth the path of his reforms. There will be opponents but many of the plans are similar to those being put forward by the Conservatives and they will almost certainly get through the Commons before the next election.

Mr Purnell, David Miliband, the Foreign Secretary, and Andy Burnham, the Culture Secretary, are the ministers most often mentioned as Blairite successors to Mr Brown.

The report was written by David Freud, a former investment banker. Mr Purnell said that the Government’s reforms would “go further than Freud”, adding: “Politics is a war for radicalism and we need to speed up.”

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