Britain's welfare budget should be redirected to funding new transport links for the north, George Osborne suggested today.
The Chancellor warned the great cities of the north are 'weaker than the sum of their parts' and need billions more in investment to compete with London.
But he said there was a 'real choice' between spending on road and rail projects to boost the economy, and rising benefits payments 'trapping people in poverty'.
A group of northern cities is demanding £15 billion to fund major improvements in the region.
The One North report, compiled by cities including Leeds, Manchester and Liverpool, proposes a 125mph transpennine rail link aimed at cutting journey times between Newcastle, Sheffield and Manchester.
Critics claim public money is targeted at London and the South East, resulting in ever-greater returns with which the north cannot compete.
But Mr Osborne insisted it was wrong to think there was choice between north and south.
He told BBC Radio 4's Today programme: 'I think the real choice in our country is actually spending money on this big economic infrastructure, transpennine rail links, Crossrail 2 in London and the like, and spending money on, for example, welfare payments which are not generating either a real economic return and at the same time are trapping people in poverty.'
He said the country faces 'public expenditure choices' and it was wrong to focus on a narrow cost-benefit analysis for individual projects.
'Of course you can look at an individual project narrowly and say, is this, in the narrow economic model, a good return on your money? Or you can try and capture a bigger vision.
'That's what I'm trying to do here; I'm trying to say, look, if you can bring these northern cities together with this individual transport schemes that collectively create this northern powerhouse, then you might achieve something really important in our country which is something that's eluded governments for many, many decades of all colours. Which is real improvement in economic activity in the north.'
Mr Osborne claims that if the economy in the north of England grew at the same rate as UK as a whole it would add more than £50billion to GDP by 2030.
The One North report covers the next 15 years and calls for improved access to ports, spending on motorways and new freight and logistics terminals.
Mr Osborne said it was a 'very imaginative set of proposals' to tackling the problems northern cities face.
'They're individually great but collectively they are weaker than the sum of their parts.
'And we need to make sure that we've got a northern powerhouse so that our economy in this country is not unbalanced, we're not wholly dependent on the global city that is London.'
Council leaders in Liverpool argue there needs to be better transport links to other major cities to create a northern 'powerhouse'
The One North report, compiled by cities including Machester (left) and Leeds (right), proposes a 125mph transpennine rail link aimed at cutting journey times between Newcastle, Sheffield and Manchester
Labour Mayor of Liverpool Joe Anderson said the Government could not forget the North if it was serious about rebalancing the economy.
He told BBC Radio 4: 'When we talk about economic powerhouses, Manchester and Liverpool, if you just take those two cities in the North together, of course we are one economic powerhouse, it is just we haven't got the connectivity.'
He said £350 million was being invested in building a superport which will allow freight from the east to come directly to the UK.
Mr Anderson went on: 'We want the capacity, the ability to ship that freight further north, east and across to Hull and the Humber.
'It's right that if we are seriously talking about rebalancing the economy, that we have to create better connectivity between our northern cities.
'It will not only help northern cities, it will help the UK economy.'
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