There is nothing wrong with his reasoning, since the welfare social contract always ordained that those who can work must work in exchange for the state caring decently for those who can't. "Work is the best welfare, a hand up, not a hand out" was New Labour's first mantra and it remains true for most people most of the time, but not all. This social contract has mostly been kept by both sides under Labour. Tax credits and benefits for children have doubled and, for the first time, pensioners are now less likely to be poor than the general population, thanks to pension credits. Fulfilling their side of the imagined contract, 70% of the long-term unemployed have taken jobs and there are now virtually no young long-term claimants, thanks to the New Deal.

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Is it that simple? There is a very grey line between the plain idle and those who are illiterate, mentally unfit, psychologically odd, ex-prisoners, unattractive to employers, non-English speakers (Labour has stopped free English courses), drug addicts, alcoholics and other bad prospects. In Glasgow, for example, what are these vacancies? Mostly part-time hotel and catering, bar work and waitering with unsocial hours. Those running programmes to help the unemployed into work say these are student jobs, or for young foreigners: the hardcore unemployed are simply not equipped to do this work. Many live on peripheral estates miles out of town with no night buses back - a taxi costs three hours' work at the minimum-wage. It was glib of Hutton to say of east European migrants: "If workers from Poland can take advantage of these vacancies in our major cities, why can't our own people?" Of course employers choose a perky young Polish graduate with no family to support, renting floor space in a communal flat, to wait tables, instead of the last remaining long-term claimants, depressed, lacking confidence and public face-to-face skills. But let's keep this in perspective: there are only 100,000 of these hard cases, and the jobseeker's allowance is a pathetic £57.45 a week, not enough to survive on. I tried, and fell into unavoidable debt within weeks. Those in debt fear taking a job as loans sharks chase them once they start earning.

Let's look at how the state breaks its side of the social contract. The real value of that £57.45 has halved since 1979: it's now worth just 10% of the average wage and falling every year. Meanwhile, Labour's New Deal for the young and for single parents was good but for the over-25s was always weak, with feeble training and little personal adviser support. Yet these 100,000 need huge help and ongoing support to stay in work: two-thirds of new claimants have claimed before in a revolving door of insecure jobs.

The government boasts of 2m more jobs in a booming economy, yet British and EU policy lets more attractive workers roll in, undercutting wages without any balancing obligation on employers to give jobs and training to the unemployed. In Glasgow, there were once no flights to Poland. Now there are three a day. The government is in denial about the full impact of the migration that helps power the economy by keeping down wages. Meanwhile, the minimum wage is so low it can be impossible for those without children to work at a profit. Why work if it leaves you even worse off? The social contract says work is the best welfare, but for some it isn't. One reason why is housing benefit - the glitch in the system. Beveridge never solved it, Labour promised a review but abandoned it; yet losing housing benefit on taking a job is a great disincentive to work.

Look closer at housing and see the damage done by gross inequality, as wealth at the top stamps on those below. London has the highest unemployment, with half its children born poor. Yet it is also the richest place. This is no mere accident of Dickensian contrasts, but partly cause and effect. As the City reaps its £9bn bonuses, that money fuels an ultrasonic house-price boom. It's bad enough around the country at 180% up in the past decade, but far worse in London. Rents are sent sky high, making it impossible for the unemployed to lose housing benefit by taking a job. They will never own a shed in the capital as the gap yawns ever wider between the 70% homeowners counting untaxed winnings every month, while the rest and their children are consigned to social housing forever.

But asked yesterday about this wild inequality, Hutton intoned the stock reply mouthed by Labour and Tories alike: "It is our aim to raise the floor not to lower the ceiling." Why is the language of rights and responsibilities, of the duty to contribute as well as to draw out, never applied to those who dance on the ceiling as they spray jeroboams of Cristal over those living on the floor? It is the job of government to police its welfare state rigorously or risk it losing public trust. Yet who could look at the deformities of the way we live now and conclude that the most pressing problem is the 100,000 misfits at the bottom?

But before you despair of Labour, wait for next July's comprehensive spending review. Even as Hutton gestured with his big stick, his benefit review will offer more support to get people into work and easier borrowing from the social fund to help people escape the loan sharks. But, above all, he repeated Labour's pledge to halve child poverty by 2010 - no shirking, no moving the goalposts. That means some £4bn of credits and benefits must be announced within the next seven months. In its crab-like way, Labour talks tough to shore up faith in the welfare system, knowing it must soon pay out more large sums or fail in what Hutton still calls the most important target of all.