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A £1 billion scheme to help more than 400,000 young jobless people into employment and training has been announced by deputy prime minister Nick Clegg today.

The Youth Contract initiative will provide 160,000 six-month wage subsidies and boost the number of internships and apprentices for under-25s over the next three years, in a bid to get “every unemployed young person working or learning again".

Private-sector employers taking on an 18- to 24-year-old who has been unemployed for more than nine months will be granted a subsidy of £2,275 to cover half the cost of the national minimum wage for six months.

In addition to the 160,000 job opportunities, a further 250,000 work experience placements lasting up to eight weeks will be offered to young people who have been on jobseeker’s allowance for more than three months.

An extra 20,000 apprenticeship payments worth £1,500 will also be made available to small businesses taking on a 16- to 24-year-old apprentice for the first time – adding to the 20,000 places announced by the government last week.

However, while youngsters who take up internships will continue to receive their unemployment benefits, those who drop out of the job scheme or quit employment after six months will lose their welfare payments.

Clegg said: “This is a £1 billion package and what’s different about it is that is gets young people into proper, lasting jobs in the private sector. But it’s a contract, a two-way street: if you sign up for the job there’ll be no signing on for the dole. You have to stick with it.”

The number of young people not in employment, education or training (NEETs) has risen to a record high of 1.16 million, according to statistics released by the Department for Education yesterday.

The Youth Contract programme – which begins next April – offered an opportunity to break the “no experience, no job” cycle and stimulate job creation, said the CIPD.

Katerina Rüdiger, the CIPD’s skills policy adviser, warned there could be a danger that employers became reliant on such subsidiaries, but added: “If the Youth Contract is successful in widening the pool of employers who have recent experience of employing young workers, we’re confident that they’ll get hooked on the potential to grow their own workforces.”

The government’s move was also welcomed by business groups the CBI and British Chambers of Commerce (BCC), who said the policy would incentivise employers to hire young people and help offset training costs.

The government was also “right to include tough sanctions for those young people who do not fulfill their contract,” said Adam Marshall, BCC’s director of policy.

“Employers do not want to employ young people, train them up, and then find they leave without good reason,” he continued. “Businesses are ready to do their bit, and the Youth Contract will help provide a much-needed jobs boost for the young.”

But the Labour party – which claimed the Youth Contract was a reincarnation of the axed Future Jobs Fund – questioned funding for the new initiative following reports that working tax credits were to be squeezed.

Clegg told the BBC this morning that the programme would not be paid for by one single tax or spending measure, but confirmed the government was considering a “number of savings” likely to be announced by chancellor George Osborne in his autumn statement on Tuesday.

On the same day, the independent Office for Budget Responsibility is expected to downgrade its forecast that public-sector job cuts will be outweighed by a significant expansion in the private sector.