Andy Burnham has created a powerful new prime minister’s department taking in parts of the Cabinet Office, Treasury and housing ministry to become the “dominant driver of the UK’s economy”.

In one of his first acts, Burnham has created the Office of the Prime Minister and Cabinet, to be led by his ally and enforcer Louise Haigh, which will oversee the No 10 operation in London, the forthcoming No 10 North in Manchester and parts of the Cabinet Office.

He is sending teams responsible for local growth and devolution from the Treasury and Ministry of Housing, Communities and Local Government to the No 10 North unit, ultimately overseen by Haigh.

However sources stressed that Angela Rayner, the housing secretary, would be keeping hold of devolution policy, with only strategy functions transferred from the Ministry of Housing, as they sought to highlight that she was not seeing her role downgraded but reinforced from the centre of government.

In a statement about the breakup of the Cabinet Office and other Whitehall changes, the government said: “This ensures that local economic growth policy and regional empowerment are no longer isolated from one another, establishing No 10 North as the dominant driver of the UK’s economy.”

Other parts of the Cabinet Office will move into a new agency called OneGov, controlled by the cabinet secretary, Antonia Romeo, which will essentially perform government HR functions such as pensions, recruitment and security vetting.

Some other parts of the Cabinet Office will be moved to other departments, with the equality office moving to the housing ministry; digital ID moving to the Department for Culture, Media and Sport; the public sector fraud authority to the Department for Work and Pensions; and the investment security unit to the Department for Business, Innovation, Science and Trade.

As part of the changes, the government will start offering relocation packages to civil servants willing to move north to the soon-to-be created No 10 operation. Whitehall sources said there would have to be generous incentives to persuade people with existing jobs working on local growth to move from London to Manchester if Burnham wants to get his new structure in place quickly.

A No 10 spokesperson said the shift was about “taking power and decision-making out of SW1 and putting it closer to people’s lives”, and that staff were already working there, including senior staffer Caroline Simpson.

Burnham will work from Manchester at least one day a week, with the spokesperson saying: “The time for resisting devolution is over.”

The move was welcomed by Hannah White, the director of the Institute for Government, whose thinktank has long called for a more powerful department for the prime minister to drive change and delivery.

“This is excellent news,” she said. “Finally, an incoming prime minister has accepted the fundamental weaknesses of the centre and is implementing the reforms called for by the Institute for Government.”

The overhaul was announced via a written ministerial statement in the House of Lords, as MPs have already finished for their summer recess.

Angela Smith, the leader of the Lords, said: “Today, we are fundamentally rewiring the state, changing the geography of government to deliver a stronger, more strategic centre that empowers local leaders, and acts as the engine room for driving economic growth across the whole country.

“To ensure places are at the very heart of government strategy, the prime minister is establishing No 10 North as the engine room of devolution and good growth in every postcode, across government and the wider economy.”

Other changes include the abolition of the Department for Science, Innovation and Technology, with much of its function returning to the business department and the culture department, where it was before the new structure was created under Rishi Sunak.

However, responsibility for artificial intelligence will go to the new Office of the Prime Minister and Cabinet, with a new prime ministerial adviser on AI. The minister for AI, Kanishka Narayan, will get a seat in cabinet and sit within this office.