Young people out of work for more than six months could be cut off from jobseeker's allowance (JSA) if the Conservative party wins the next election.
George Osborne told the Mail on Sunday that young people out of work would have to earn their benefits through activities such as cleaning local parks and other "community projects".
Instead of JSA, 18-21 year olds will receive a "youth allowance". The level will remain the same as JSA, which is currently £57 a week.
"We are saying you will receive an allowance but if you can't find work after six months, you will have to work for the dole," Osborne told the Mail on Sunday. However, certain groups such as single parents will be exempt from the measures.
The money saved from the welfare cuts would be channeled into schemes to bring down youth unemployment. Furthermore, the government's cap on the total amount of benefits a family can receive would be reduced from £26,000 to £23,000.
The proposals will be made at the Conservative party conference in Birmingham but may be overshadowed by two Conservative resignations.
On Saturday, Mark Reckless became the second Tory MP to cross the floor to join Ukip. Adding to David Cameron's woes Conservative minister Brooks Newmark resigned after sending sexually explicit photos of himself over the internet.
Speaking to the BBC, Brooks Newmark said:
I have no-one to blame but myself. I have hurt those I care about most.
I am so, so sorry. But I just need time with my family.
The double whammy of bad news has drawn attention away from the Conservatives' pledge ahead of their conference that people under 40 will be able to buy their first homes for 20 per cent less than market value.
David Cameron revealed that 100,000 new homes would be built especially for this purpose and that the brownfield land for the development has already been identified.