A top aide to Rishi Sunak claimed workers in northern towns should "accept lower wages" to compete with the South because "London is London".
The Chancellor, who is said to be blocking cash for key "levelling up" projects, has been urged to explain why he takes advice from economist Tim Leunig.
The Treasury aide is accused of seeing the North as "a lost cause" after a think tank report called Cities Unlimited, in which he wrote “the only way towns and cities that are less well connected (...) can compete to attract firms is to accept lower wages".
Mr Leunig was hired by Sajid Javid as economic advisor in 2019 and helps ministers with the Treasury's long-term strategy.
His 2008 paper for the right-leaning Policy Exchange told ministers - who have trumpeted plans to move Treasury staff to Darlington - that they "need to accept above all that we cannot guarantee to regenerate every town and every city in Britain that has fallen behind".
It reads: “We cannot, with the best will in the world, move JP Morgan to Blackburn, or Deutsche Bank to Sunderland.
"We may wish it otherwise, but we know that it will not happen. London is London.”
It is understood Mr Leunig plans to leave his role in Government "soon".
The controversial paper concluded there was "no realistic prospect" that towns and cities "can converge with London and the South East" as they "suffer from a much less attractive skills mix than London" .
“The North, the power house of the industrial revolution, is now a less desirable location for business for reasons that are geographical and entirely outside its control or that of central and local government," it said.
Mr Leunig - who Labour accused of seeing the North as a "lost cause" - went on to make the case for expanding London, saying it was "below its optimal size" and could continue to attract more workers from other parts of the uK.
The paper concluded: “We believe therefore that part of the solution to urban regeneration in areas far from London is to allow London to grow, so that some of the people living in those areas are able to migrate to London”.
It comes amid a flurry of reports that the Chancellor moved to block extra cash for the Government's flagship Levelling Up agenda.
Dan Carden, Labour MP for Liverpool Walton, told the Mirror that Boris Johnson's flagship "levelling up" plans had "unravelled into the wholesale ‘managed decline’ of northern towns".
He said: "The Chancellor's most senior advisors see the North as a lost cause and beyond revival.
"They think people in the North should settle for lower wages to compete with the rest of England.
"The reality is that it is this government’s rehashed Thatcherite policies that are driving down wages and job security, while investing a fraction of the infrastructure spending into the north, that is handed to London each year.
"I was born in Liverpool in the 1980s, the decade the Tories plotted to put our city into 'managed decline'.
"Despite their empty words, today’s Tories treat the North with the same level of disdain.
"Rishi Sunak must explain why he is taking advice from someone who has written off the North and clearly doesn't understand the vast potential value of our regional economies."
Meanwhile, Communities Secretary Michael Gove was in Liverpool, speaking about levelling up.
He said in a speech: “We simply can’t go on with the gulf between rich and poor, North and South, growing.
“It is not simply a matter of social justice, it is also a matter of economic efficiency.
“Inevitably in the course of however many years we take to meet that mission there will be arguments between left and right, between red and blue, but ultimately we are all on the same team and that is a team committed to making sure opportunity is more equal across the whole of our United Kingdom.”
The Treasury declined to comment on the report.
