In the dying days of the last regime, the Freud Report - which called for large sections of the welfare state to be privatised - became a political football between Tony Blair and Gordon Brown. The then prime minister wanted it as his legacy, the then chancellor did not want it as an inheritance and did all he could to emasculate its proposals.

On one occasion it is said that Mr Freud had to sit through a 45-minute shouting match with Mr Brown, before being aggressively cross-examined by a room full of Treasury advisers.

"It was a robust process," the banker admits. "There was a negotiation. Normally the negotiation takes place over two years; they had a week and a fairly obdurate writer who's used to being beaten to a pulp in the City. It was like a deal and I thought I've got to get through this as unscathed as possible."

This week, however, Mr Freud was hired by James Purnell, the new Work and Pensions Secretary, as an adviser and asked to help implement nothing less than a revolution in the welfare state.

There has, he believes, been a sea change in Labour's thinking about the benefits system. "Gordon Brown has now said they're going to do it," he says. "Peter Hain [the previous work and pensions secretary] was worried about the Left. Purnell is showing astonishing energy, there is going to be a much more single-minded ferocity."

Mr Freud's big idea is that the private sector be put in charge of the long-term unemployed. Companies taking part would receive a huge fee for getting somebody to stay in a job for more than three years but nothing if they fail.

There will be bonuses for hard cases, and no special treatment of disabled people or lone parents with children at school. "There are about 3.1 million people not working, I think we can get about 1.4 million back to work," Mr Freud says.