He has asked Whitehall officials to study plans for a regional system as a way of decentralising the Welfare State. They could lead to a huge row, with Opposition parties and pressure groups accusing the Government of trying to cut social security benefits.
If a regional system was introduced, unemployment benefits would be administered locally - probably by town halls - and partly funded by local taxes. Benefits would be paid at local rates, so that they reflected the different costs of living in different parts of the country. London's, for instance, is 17 per cent higher than the national average; Newcastle 12 per cent lower.The system might eventually be extended to other benefits, such as family credit and even the child benefit that is paid to all parents.
Switzerland already has a system of localised social security, and Mr Lilley went there earlier this year to see it at work. Cantons, or local areas, can raise taxes to pay "top-ups" to people living in more expensive regions. Mr Lilley, who is said to be "very enthusiastic" about the idea, has asked his advisers for more details.
With Britain's social security bill now pounds 74bn a year - a third of Government expenditure - Mr Lilley is under pressure to find ways of cutting costs. A localised system would enable ministers to contain the cost of benefits, while leaving councils accountable for a rising tax bill.
It is likely that Mr Lilley's continuing tenure of Whitehall's biggest spending department will be characterised by two themes: cuts in spending, and devolution of responsibilities to lower tiers of government.
The first indication that localised benefits are being considered by the Department of Social Security was made in last week's Green Paper proposing an earnings top-up to single and childless people in low-paid work. From October next year a pounds 75m pilot scheme will offer over three years an average top-up of pounds 23 a week to 20,000 people in eight areas of the country. This will enable ministers to assess its affect on unemployment, the labour market and wages.
Local benefit rates have been discussed by the right for several years. In the early Eighties, the right-wing think tank, the Adam Smith Institute, set up a committee, whose members included Michael Portillo and Michael Forsyth (now Scottish Secretary), to study such proposals. Last year David Willetts, MP, one of the most influential Tory thinkers on the Welfare State, suggested in a pamphlet that "we should try to give greater local discretion for the provision of money and services through the welfare state."
Earlier this year Mr Lilley outlined his growing interest in the localisation of benefits in a speech to the Social Market Foundation, publishers of Mr Willetts' pamphlet. "Local pilots," he said, "can pave the way for changes in nationwide rules and conditions. But this in turn raises the question whether all social security benefits should be uniform nationally and centrally administered.
"Britain has had one of the most centralised and uniform benefit systems in the world ... it means local provision cannot be tailored to local circumstances. It becomes harder to bring local knowledge to bear on the delivery of benefit. It is harder to mobilise local pride to generate positive alternatives to welfare dependency."
But moves to a localised system would meet opposition if they involved lower dole rates for unemployed people in, say, Wales and the north of England. Bharti Patel, of the Low Pay Unit, said it would be " highly divisive". Paul Convery, of the Unemployment Unit, said: "There is an intellectual attraction in this for the Secretary of State. While there may be an argument for a system whereby people in London receive more than those living in cheaper areas, we suspect that this is really all about paying less."
Although being studied by Mr Lilley's advisers, localisation of benefits remains a long-term proposal. The chief hurdle is to work out how "welfare tourism" - where claimants move from one area to another in search of higher benefits - could be avoided. The Swiss have a complex system of inter-cantonal payments - but developing such a regime could be costly.Reuse content