There are between 8500 and 13,500 youngsters aged 16 and 17 not in work, training or education.
"At the moment we just completely lose track of these people until they emerge at 18 on a benefit," Mr Key said.
"Ninety per cent of them go on a benefit. Our capacity to target those young people is really important."
Many of the support services would be private providers with cash incentives to achieve results, such as helping a person into training.
Mr Key also flagged changes to the way a benefit is paid to those aged 16 and 17, and to teen parents up to and including the age of 18. There are about 4000 of these beneficiaries.
The Government wants to pay the essentials such as rent and the power bill on their behalf, and restrict what else can be bought by providing a pre-loaded and monitored payment card that "cannot be used to buy things like alcohol or cigarettes". The policies would not affect those on an invalid benefit.
Otorohanga mayor Dale Williams, who chairs the Mayors' Taskforce for Jobs and is involved with Youth Transitions to support school leavers, said the policies were a very positive step.
But he said performance-based incentives might tempt providers to focus on easier cases to pocket the cash bonus, at the risk of neglecting the more vulnerable. "It's possible, and a little bit of that happens now."
He said it was frightening that there was a dearth of information about school leavers.
"Nobody really knows the number, nobody really knows where they are, and if you don't know that, how on earth can you help them?"
Rick Boven, director of think-tank the New Zealand Institute, also welcomed the measures but suggested involving employers directly with school leavers.
"You really want to get employers engaging more closely with students and schools, so if you put another agency in between, you can create a little bit of a barrier to that communication."
The institute recently released a report showing New Zealand was the worst among developed countries for the number of unemployed high school dropouts.
Labour's employment spokeswoman Jacinda Ardern called the intervention food stamps for youth, and questioned what evidence there was for a need to restrict beneficiary spending.
"I've seen no evidence to date that the 1600 people on an independent youth benefit aren't receiving the kind of support that's required."
Mr Key acknowledged the proposals could be seen as intrusive, but he said vulnerable teenagers were in need of intervention.
"Would you give the average 16- or 17-year-old anywhere between $200 and $400 a week? Would you ask them to raise a child totally abandoned on their own?
"The alternative is the current system, which is abandonment ... here's a dollop of cash and good luck," he said.
CLOSING THE GAP
Between 8500 and 13,500 of those aged 16 and 17 not in work, training or education
* Changing privacy law so schools have to notify the Government if students aged 16 and 17 leave during the year.
* Identifying those at risk and contracting support services to provide wraparound services, with cash bonuses for achieving results such as helping them complete a training programme.
About 4000 aged 16 and 17 on a benefit or teen parents (up to 18)
* More funding for support services, such as childcare services.
* Rent and power paid directly from their benefit; pre-loaded payment cards provided but can only be used for essentials, not for booze or cigarettes; less discretionary income.
* Obligations include being in education, training or work-based learning, and to attend budgeting courses or parenting programmes if required.
* Childcare to be paid for but with an expectation that teen parents will be in education or training by the time their child turns one.
Timeline and costs of Govt proposals
* Plan to provide up to 10,000 more training placements through Youth Guarantee and Trade Academies in the next two years.
* $20m to $25m a year estimated costs.
* Legislation to be introduced at the start of 2012 if National wins the election.
