Tensions have surfaced within the coalition government over proposals to make it easier for businesses to fire workers.

The "compensated no-fault dismissal" scheme is the most divisive proposal in a report for Vince Cable's Business Department by venture capitalist Adrian Beecroft, which was published ahead of schedule after being leaked.

Mr Cable dismissed the idea as "complete nonsense", while close Liberal Democrat ally Lord Oakeshott denounced it as "the economics of the madhouse", saying it would be "bonkers" to undermine demand in the economy by making workers fear for their jobs.

Their opposition was backed by senior union leaders including Unite union general secretary Len McCluskey, who said: "Beecroft's proposals would be disastrous for the economy. They will not create a single job. It is a charter for rogue bosses to make life even worse for working people in austerity Britain."

TUC general secretary Brendan Barber accused Tories of "using the economic crash as an excuse to smuggle in policies that a big majority of voters oppose".

However, Tory MPs spoke out in favour of the change, which they said would encourage businesses to hire workers by removing the worry that they may not be able to afford to get rid of them if they do not perform, the Press Association reported.

Downing Street made clear that prime minister David Cameron has not dismissed the proposal out of hand. A spokeswoman said the PM was weighing up options for making it easier for businesses to employ people and achieve growth, but was not "wedded" to any particular solution.

In his report, Mr Beecroft recommended compensation capped at £12,000 for employees removed under the scheme, which he said would make it more acceptable to workers and unions and eliminate many employment tribunal cases for constructive dismissal.

He said: "While it may seem counter-intuitive, even making it easier to remove under-performing employees will in the short run not increase unemployment as they will be replaced by more competent employees.

"In the long run it will increase employment by making our businesses more competitive and hence more likely to grow."

Mr Beecroft warned that Britain's economy requires "radical changes to encourage employers to take on more staff and thus to grow". Measures which encourage people to take employment but discourage employers from offering it "must be changed, permanently or temporarily, to help the country out of its difficulties", he said.

Labour leader Ed Miliband said the proposals would encourage a "short-term, fast-buck, take-what-you-can culture" by allowing bosses to fire employees at will rather than investing in developing their skills.

Trade unions denounced the plans as "disastrous for the economy".

Mr Beecroft's report was commissioned by the Business Department and submitted in October, but it has been kept under wraps amid reports of friction between Tory and Lib Dem ministers. Business minister Mark Prisk told MPs that 17 of its 23 recommendations were already being put into action.

Mr Cable has called for more evidence on controversial elements of the package, including the no-fault dismissal scheme, with submissions due to be completed by 8 June.

In a statement as the 16-page report was published, he made clear he regarded the hire-and-fire plan as "counter-productive".

He said: "At a time when workers are proving to be flexible in difficult economic conditions, it would almost certainly be counter-productive to increase fear of dismissal.

"In my daily conversations with businesses, this has very rarely been raised with me as a barrier to growth. Businesses are much more concerned about access to finance or weak demand than they are about this issue."

Other proposals in the report which are under consideration by the Business Department include watering down the TUPE protections for workers transferred from the public to private sector, and reducing the consultation period on collective redundancies from 90 to 30 days.

But the department said it will not proceed with Mr Beecroft's suggestion that small businesses should be exempted from various employment laws, including flexible parental leave, the ban on unfair dismissal and the right to ask for flexible working.

A spokesman also said the report's proposal to cap awards in discrimination cases would be illegal under EU law, while the government will not proceed with Mr Beecroft's recommendations that it should be made easier to recruit workers from abroad and that the immigration system should be simplified.

Conservative backbencher Damian Collins called on Mr Cable to listen to business's response to the report.

The Folkestone and Hythe MP has edited a Growth Factory report calling for government action to boost output in the industries of the future, which will be published on Thursday.

He warned: "It would be terrible if smaller businesses are holding back on recruiting because they are worried about whether they can sustain the income they need to keep those people on over a longer period of time.

"If we have a series of measures which will encourage and incentivise them to take on more staff, that will be a good thing."

British Chambers of Commerce director of policy Adam Marshall said Mr Beecroft was right to urge ministers to "consider and progress all proposals that would give businesses greater confidence to hire - an outcome that would benefit companies, individuals and the UK economy as a whole".

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