Rt Revd Alan Smith wrote an open letter to The Observer before government ministers attempt to reduce the benefits of people on the Employment and Support Allowance Work-Related Activity Group (ESA WRAG) on Tuesday.
The ESA WRAG is comprised of people currently ruled too ill to work who could become well enough to work if they receive adequate treatment, training and support.
Specifically, the government wants to reduce ESA WRAG payments from £102.15 a week to £72.40 a week - a reduction of around £1500 a year.
The government's 'mental health revolution':
£290 million to provide specialist care to mums before and after having their babies
Waiting time targets for teenagers with eating disorders and people experiencing psychosis
Nearly £250 million for mental health services in hospital emergency departments
Over £400 million to enable 24/7 treatment in communities
Rt Revd Smith has expressed concern because around half of ESA WRAG claimants - around 250,000 people - are mentally ill in some way.
He perceives the government's attempts to cut the benefit as contradictory to announcements of a "mental health revolution" last month, where it pledged almost a billion pounds towards fighting psychiatric illnesses.
The Bishop wrote: "I welcome the prime minister's initiative on mental health care, but I am puzzled why the government at the same time wants to cut out-of-work benefits to those with mental health problems.
"The House of Lords called into serious question the notion that those found to be unable to work can be incentivised back to work by a cut to their living standards.
"This should not be allowed to happen.
"A cut in benefits may incentivise the fully able to find employment, but the government has yet to provide any evidence that the same would hold true for those in the ESA WRAG, the majority of whom really do want to work."
Prime Minister David Cameron said: "Mental health is a major problem in our country and it must be properly addressed.
"By providing this extra £1 billion a year for mental health care we will make sure it gets the attention in the NHS it needs.
"But I want to go even further and end the status quo that sees more than half of people with mental health conditions unable to find a job - ensuring tens of thousands are able to find or return to work over the next 5 years."