But former Australian of the Year Patrick McGorry has cautioned that in order to keep people off the Disability Support Pension, mental health and employment experts need to be able to work together to tailor early intervention programs for those with a mental illness.

Patrick McClure’s discussion paper on welfare, released on Sunday, suggests that only people with a permanent impairment and no capacity to  work should receive the DSP.

While the paper did not define ‘‘permanent’’ disability, both Mr McClure and Social Services Minister Kevin Andrews have said that many mental health conditions are ‘‘episodic’’ in nature. The paper also says that people with mental illness have ‘‘better life outcomes’’ if they maintain some workforce participation and that more could be done to support them to work.

In the wake of the report’s release, Labor and the Greens have accused the government of demonising people on welfare.

On Tuesday, Greens disability spokeswoman Rachel Siewert said that the government was ‘‘seeking to stigmatise people who receive income support, especially the DSP, to help with their campaign to cut social security’’.

Labor leader Bill Shorten has accused the Coalition of ‘‘sinking the boot into people with disabilities’’.

Mr Kennett – one of Australia’s most prominent mental health advocates and a former Liberal premier – told Fairfax Media that people should have their illnesses ‘‘properly tested’’.

‘‘The very fact that you have a mental illness should not be seen as an automatic entry to lifetime support,’’ he said on Tuesday.

He said that there were ‘‘degrees’’ of mental illness that can effect an individual profoundly or ‘‘less so’’.

‘‘Those who are entitled [to permanent welfare] beyond reasonable doubt should be looked after. Those who are not . . . must understand that there’s an obligation on them to try and return to good health as quickly as possible.’’

Mental health expert Professor McGorry told Fairfax Media that it was "not a great outcome" for young people in particular to end up on the DSP and that many were desperate to avoid it.

But Professor McGorry, who also heads up Orygen Youth Health, cautioned that the government would have to spend money rather than just cut funding in the areas of mental health and disability.

He told Fairfax Media that in order to stop people ending up on the payment long-term, early and targeted intervention was required.

He said Orygen has had enormous success with Individual Placement and Support (IPS) services, in which employment sector experts work alongside mental health experts to assess an individual’s situation, make a study or work plan, work on CV and interview skills, teach stress management in the workplace and negotiate with employers.

Orygen has found that 90 per cent of young people who had a first psychotic episode went back to work or study under the IPS model.

"You do save money by looking after people at the beginning," he said.

Stigma around mental illness

According to Mental Health Council of Australia chief executive Frank Quinlan, many people with mental illness want to work, but are hampered by an enormous stigma around mental illness.

‘‘Many people are ready, willing and able to get back into work, but the work environment and the structure of workplaces doesn’t always allow them,’’ he said.

When asked if it was easy for people with episodic mental illness to get work, Mr Kennett said there were offices that treated employees badly, but workplaces were changing.

As of June 2013, more than 31 per cent of people receiving the DSP had a psychological or psychiatric condition as their primary medical condition. This compares with 24.7 per cent in 2003. Muscular-skeletal conditions make up 26 per cent of DSP recipients, with 12 per cent listing having an intellectual or learning condition.

with Jacqueline Maley