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The government's flagship new deal for jobseekers is in danger of failing just as unemployment has started to rise, a think tank has warned.

The government's Flexible New Deal uses the private sector to provide employment services to the long-term unemployed.

However, think tank SMF said the way in which contracts are being awarded by the Department for Work and Pensions as part of the scheme is encouraging firms to make unrealistically cheap bids for the work.

This could mean the government will have to bail out failed providers, costing tax-payers millions, SMF claims.

In addition, 'flat-fee' payments to providers for each person they find a job effectively encourages firms to write-off the most needy job seekers and giving firms the bulk of the money after jobseekers have remained in work for just three months results in 'revolving door' employment.

Ian Mulheirn, SMF chief economist, said: "With unemployment at a 16-year high and set to rise further with the impending downturn, the Flexible New Deal will face a stiff head-wind.

"The devastating impact of the last recession on the long-term unemployed took a very long time to resolve. It is crucial that the government doesn't leave them high and dry this time."

SMF has urged the Department for Work and Pensions to pilot alternative payment systems when the Flexible New Deal is trialled later this year.

The think tank said a better tendering process and payment system should be established for the second phase of contracting, due early next year.