The Shadow Chancellor said the difference between the investment in London and the South East compared to the North was “almost discriminatory” as he set out plans to rewrite the Treasury rulebook to ensure government money flows outside the capital and its surrounds.
He committed to reforming the so-called “Green Book”, which sets out how Treasury officials and Ministers should evaluate spending decisions, to ensure it takes better account of the needs of the UK’s regions.
And he suggested a Labour government would be as radical as unified Germany was in ensuring the country is better balanced.
In 2009, a study originally commissioned by the German government found that 1.3tn euros had been transferred from the west to rebuild the formerly Communist east since reunification in 1989/90.
Asked if that was the level of radicalism a Labour government would pursue, Mr McDonnell said: “It is yeah, and the radicalism isn’t coming from us it’s coming from grassroots, people are not going to tolerate any more the neglect of the regions, the towns and small towns and particularly coastal towns as well.
“They are looking for a Government to acknowledge the neglect that’s gone on over the last eight years in particular and acknowledge them and work with them.”
Mr McDonnell told reporters at Labour’s Party Conference in Liverpool the current system the Treasury uses to decide what projects money is spent on does not work.
He said the Green Book would always direct, for example, transport spending toward London because there are more passengers, and so it is easier to justify spending in the capital.
“You’ve got to be more creative than that because actually the investment should be based upon the objectives you want to achieve within a particular region,” he said.
“If you keep on doing it based on historical precedent you will never ever break that cycle of decision-making in Westminster that pours all the resources into London and the South East.”
Meanwhile, in his keynote speech to the conference today Mr McDonnell will say Labour plans for employee ownership schemes in large companies could net almost 11m workers up to £500 a year each.
But additional income would be capped at that level, with any further dividends going to a national fund to pay for public services and welfare, in an effective new levy on private business worth an estimated £2.1bn a year.
Mr McDonnell announced plans for “inclusive ownership funds” (IOFs) at the TUC congress in Manchester earlier this month, telling union leaders they would give workers “a say in the management and direction of their company”.
And today he will pledge that workers will also receive dividend payments direct from the fund.
Under Labour’s plans - set to feature in the party’s next election manifesto - legislation would require private sector companies with 250 or more employees to transfer at least 1 per cent of their ownership into an IOF each year, up to a maximum of 10 per cent. Smaller companies would be able to voluntarily set up an IOF.
Labour calculates that 40 per cent of the private sector workforce - some 10.7m people - will initially be covered by the scheme. Dividend payouts will be made at a flat rate to all employees of the firm.
The funds will be held and managed collectively and their shares cannot be sold or traded. Workers’ fund representatives will have voting rights in companies’ decision-making processes like other shareholders.
Aides said the creation of the funds would go some way to redressing growing inequalities after a decade when average pay has not increased in real terms.
Mr McDonnell will tell the Liverpool gathering: “Workers, who create the wealth of a company, should share in its ownership and, yes, in the returns that it makes.
“The evidence shows that employee ownership increases a company’s productivity and encourages long-term thinking.”
But Tory Chief Secretary to the Treasury Liz Truss said: “This proposal is yet another tax rise from a party that already wants to hike taxes to their highest level in peacetime history.”