Labour has failed to tackle soaring youth unemployment and must launch a “system reset” involving a fresh attempt to overhaul health and disability benefits, a report commissioned by the government is to warn.

Alan Milburn, who is leading a review into why almost a million young people are not in education or work, said ministers had so far responded with a series of disjointed jobs programmes.

“It’s going in the wrong direction,” Milburn said. “When you look at that picture I guess our conclusion is it’s a catastrophic systems failure.”

Efforts to support young people – in education, health, and Labour’s youth guarantee – were “very welcome steps”, he said. However, he criticised Keir Starmer for lacking a cohesive strategy.

“My question is: who is joining the dots? If ever there was a case for mission-based government, this is it,” he said.

“Is it laddering up to a [job market] participation-first service, where everybody is aligned behind the shared objective? Which is that every young person should be given the opportunity to earn or learn. And the answer to that question is: that’s not what’s happening.”

In a highly anticipated report due to be published on Thursday, the former Labour health secretary will say that the government must take a fresh approach to overhauling Britain’s system of welfare and jobs support for young people.

Experts have warned of a crisis in youth jobs, with official figures due on Thursday expected to show the number of young people not in education, employment or training (Neet) is close to breaking through a million.

Britain has the third-highest rate of 16-24-year-olds who are neither earning or learning among wealthy European countries.

The figures come with Labour under pressure from business leaders who argue that the £25bn increase in employers’ national insurance contributions by the chancellor, Rachel Reeves, and an attempt to equalise minimum wages between young and older workers have contributed to soaring rates of youth joblessness.

Tasked with leading an investigation into the causes of record unemployment and inactivity among 16-24-year-olds, Milburn’s interim report will focus on how to tilt Britain’s schools, skills system, health service, welfare support, and the labour market to boost youth jobs.

In an interview with the Guardian, Milburn urged Labour not to shy away from welfare changes after Starmer was forced into a chaotic U-turn last year over a plan to slash billions of pounds from disability support. Ministers have also commissioned the welfare minister, Stephen Timms, to lead a review of disability benefits.

Some economists warn that welfare spending is rising at an unsustainable rate amid pressure on the government finances. However, charities say cuts could plunge vulnerable individuals into poverty amid the cost of living crisis.

Milburn criticised Labour’s previous attempts for prioritising cost savings over outcomes for people with health conditions and disabilities. Any measures to cut welfare support would need to be offset by a boost for employment support to help those who want to find work, he said.

“It obviously went wrong and I think there has been a lot of soul-searching,” he said.

“If you frame welfare reform through a cost-out lens, guess what you get? That’s not the way to approach this.

“It’s needed more for moral reasons than for fiscal reasons. It can’t be right that young people who want to work are not being supported to do so.”

Milburn said the welfare system “clearly” had to protect those who could not work. “That is unalterable, inalienable,” he said.

However, he said the current system of health and disability benefits was failing many young people who had never worked, saying that many could be helped to find a job instead with more help from employment services.

“I just don’t buy this thesis that – just because you get a diagnosis – that somehow or other, you have got to end up in a world of benefits rather than a world of work. Tens of thousands of disabled people are proving every single day that a diagnosis should not limit your aspirations and ambitions in life.”