The Tories should look to Europe and the voluntary sector in a bid to reform the welfare state, David Willetts has said.

Describing a "welfare society", the shadow work and pensions secretary said the Conservatives should be ready to learn from social democratic countries which view centralised government as "a threat".

He said Britain had the most centralised, most nationalised, most state-controlled welfare system of any Western country".

Willetts, a moderate Tory who supported Michael Portillo during his party leadership bid, said the voluntary sector had a major part to play in welfare reform.

"We believe in a society in which there is a network of voluntary groups and charities, yes and private organisations too, helping people far more sensitively than sate bureaucracies ever can. It is the network of volunteers and charities which show what a civilised society we really are. That is why so many in this hall give time and effort to their local community," he said.

Although the Tories are set to embark on a root and branch review of policy, Willetts said any new welfare policies must "treat people with dignity, strengthen families, encourage saving".

He warned his party that it must be seen to be tolerant of the new society in which it operates. "They [the public] don't believe we recognise that they come in all shapes and sizes. That is why we must show that we understand and share the realities of being a parent today," he said.

In one of the first Tory conference speeches to break away from the anti-terrorism consensus, Willetts turned his fire on the government's failure to deliver on welfare reform.

"Labour are failing in their aim of reforming the welfare state, so we must be ready to take up that historic responsibility. We can do so by applying basic Conservative principles, creating a welfare society not a welfare state," he said.

He blasted the "intrusive, complicated and degrading" means tests which, he said, stripped single parents, families and pensioners of their dignity.