Iain Duncan Smith’s programme to get people back to work is “hanging by a thread”, observers have warned, after figures from the government’s spending watchdog showed higher rates of unemployment and lower growth than previously forecast.

Providers of the £5bn Work Programme are already working flat out to meet ambitious targets for the number of people they get back into work over the next few years. They include some of the UK’s largest service companies, such as A4e and Ingeus Deloitte.

However, figures published on Tuesday by the Office for Budget Responsibility show that their job has just got harder, with one estimate suggesting the lower growth figures will result in 7 per cent fewer people re-entering the workplace from 2010 to 2015.

Ian Mulheirn, director of the Social Market Foundation think-tank, said: “The OBR is predicting that the numbers claiming unemployment benefits will be 460,000 higher in 2014 than they thought when the Work Programme was commissioned.

“The combination of rising caseloads, falling labour demand, and the shift to 100 per cent outcome-based funding for providers is dire news for Work Programme viability.”

Providers have already warned they would struggle to meet the rising targets set by ministers. This could be financially damaging as a large chunk of the money the companies receive for running the programme is set by results.

Mr Mulheirn has previously said that if companies look set to miss their targets, they might ask for a taxpayer bail-out or threaten to walk away from the project altogether.

The OBR predicted the number of people claiming out-of-work benefits would be 1.7m on average each year from 2012 to 2015 – a sharp rise from last year’s forecast of 1.3m.

The claimant count is now set to be 460,000 higher in 2014 than was forecast this time last year, when the Department for Work and Pensions set their targets. That year is especially sensitive for providers as it is the first one in which they will be paid solely by results.

Tony Wilson, policy director at the think-tank Inclusion, has calculated that providers will be able to place an average of 7 per cent fewer people in work over the next five years than previously estimated.

Mr Wilson said: “It’s an iron law that lower growth means fewer jobs. So Jobcentre Plus and the Work Programme will find it far tougher to hit their targets. The government has a choice – either lower the targets and accept higher unemployment, or invest more in getting people back to work.”

A spokesperson for the department said: “We always said the road to recovery would be tough – there is a long way to go before we deal with all the economic challenges ahead. But even in these tough times there are jobs out there, with Jobcentre Plus taking 10,000 vacancies every working day.

“The Work Programme will continue to provide tailored support so that unemployed people can overcome whatever barriers they face. Providers were required in their initial bid to demonstrate that they had the capacity to deliver the Work Programme.”

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