This paper explores the UK government"s approach to combating social exclusion since 1997. It considers the philosophy and political economy underpinning New Labour policy, and explains the economic and social policy prescriptions that follow from these principles. The government"s social exclusion agenda has provoked a wide range of controversies and debates in the academic and political communities. In addition to putting a perspective on the government"s political economy of social exclusion, the purpose of this paper is to explore key debates. The story of New Labour"s political economy of social exclusion therefore pauses at key junctures to discuss eight controversies and dilemmas representing a range of critical responses to third way thinking about social inclusion. It is concluded that New Labour"s approach to social exclusion is contractarian, offering conditional access to the mainstream to outsiders. The individual pledges to take responsibility across the full spectrum of social life, from enhancing her employability to maintaining a healthy life style. The state is re-shaped to bear part of the risk that such responsible individuals face, but in ways that minimise dependency and the social wage.