A new report out today says there is a "significant lack of understanding" within Government of the Church of England's huge contribution to social welfare provision.

The "Moral, but no compass" report was launched by the Von Hugel Institute on Monday, a year after it was commissioned by the Bishop for Urban Life, the Rt Rev Stephen Lowe.

The report's authors pointed to the "significant lack of understanding of, or interest in, the Church of England's current or potential contribution in the public sphere" at the levels of local and national government.

"The Church contributes a huge amount below the radar of its own perception and certainly below the radar of any evidence gathering of the Charity Commission or in departments of state," said Francis Davis, co-Director of the Centre for the Study of Faith in Society at the Von Hugel Institute and one of the authors of the report.

"The Church, should it so wish, has the skills and resources to respond in a new way to make an enhanced civic contribution."

He went on to praise the contribution of the Church in social welfare, demonstrated by the high number of bishops engaged in civic activities and the number of churches that double up as cafes, post offices, youth clubs and even GPs to ensure that their local communities do not go without vital services.

"As researchers we were astounded...to uncover the empire of civil society that's out there, run, sustained, maintained, funded and kept going by Anglican buildings, Anglican volunteers, Anglican clergy in pretty much every neighbourhood across the country," said Davis.

He noted that, prior to the report, the Church "perceived itself to be well understood by government and by society at large".

"What we discovered was that actually the Government had no evidence about the Christian churches in general and the Church of England in particular when it came to its own policy planning framework," he said.

Davis claimed that the Government had underestimated the number of faith-based charities operating in the country by as much as 50 per cent, resulting in the "significant underestimation of the civic and volunteering and social welfare contribution that they make across the country".

The report's researchers picked up three major concerns among respondents, who included clergy across every Anglican diocese, and every single Anglican bishop in the Church of England. These concerns included what Davis called a "profound religious illiteracy and lack of understanding among central and local state government" as to the contribution of faith-based groups.

There were also "significant weaknesses", he added, in the way that the Office of National Statistics and the Charity Commission count the number of charities and faith-based charities, in that they do not include parishes.

A third concern was raised over aspects of the present state of the contracting process in the outsourcing of welfare and other social services. Some respondents felt that the system was over-centralised in many state departments and Local Authorities. It was also, they felt, "too much driven by cash and not by principles and the needs of people, and not pro-poor enough", according to Davis, and failed to take into consideration the multiplicity of needs when allocating funds, the report also found.

"In that sense the state is meaning well, it is principled, it has good intentions," Davis told journalists, "but it doesn't have a compass by which to direct itself because it doesn't have the evidence to ground its reflection."

The report also warns that the Government is focusing consciously on "minority religions" such as Islam.

It makes a number of recommendations, including the introduction of new legislation to "create a level playing field for faith-based agencies seeking to engage in public service reform, contracting and civic action". It also recommends the establishment of a new Minister for Religion, Social Cohesion and Voluntary Action.

Such a minister would help improve evidence gathering and coordination of policy so that people of faith "become part of a process which is about religion, social cohesion and voluntary action and not compartmentalised into the parts of government which are rightly having to deal with the struggles of radicalisation", Davis said.

The Archbishop of Canterbury, Dr Rowan Williams, and the Archbishop of York, Dr John Sentamu, said in a joint response that the report painted "a general picture of committed social engagement which if grasped imaginatively by the state could, indeed would, yield some extraordinarily positive results".

They added, "On the other hand it reveals a depressing level of misunderstanding of the scale and quality of contribution faith-based organisations make to the civil and civic life of our nation - our common good."

The Archbishops said that the report's recommendations would need serious consideration, a point echoed by Bishop Lowe who said he expected a very wide debate on the report within the Church.

At the launch, Bishop Lowe welcomed the positive light that the report had cast on the Church.

"I don't think the Church is very good at actually selling itself," he said. "In fact we spend a lot of time bemoaning the fact that people say we are declining without recognising the immense contribution we make as the largest voluntary organisation in the country. That sense of our activity is often, I would almost say always, forgotten."

He said that the Church of England had to equip itself in order to take on a greater role and challenged the Government to be clear about its intentions to partner with the Church in welfare provision.

The Bishop remained positive about the Church's future role.

"I hope and believe that the Church will be popular because it offers a care not based on profit but based on the concern for body, mind, and spirit...a holistic approach to the way in which welfare is offered.

"That is one of the distinctive things that I think the Church offers and benefits the country as a whole."