Mr McDonnell said Labour would base its planned National Transformation Fund (NTF) in northern England so “better decisions will be made” about how the money is spent.
Labour has promised to create the fund to invest £250 billion on transport, energy systems, communications, scientific research and housing, over 10 years.
On BBC’s Andrew Marr Show, Mr McDonnell said: “What I’m saying is we need to pour money into the North, investment long term on infrastructure, training, rebuilding the economy, but the better way to make decisions is to have them made in that locality, in the region.
“So I’m saying let’s split Number 11, take the national transformation fund - where these resources will come from - take those decisions makers and administrators and take them up north.”
The Shadow Chancellor made the claim in an interview with the Manchester Evening News, which last month joined with The Yorkshire Post and dozens of other northern titles to call for a package of policy measures to turbo-charge the North’s economy.
This Power Up The North collaboration between a number of newspapers and websites from JPI Media, Newsquest and Reach comes exactly one year after the launch of the award-winning One North campaign in the wake of unprecedented chaos on the region’s railways.
Mr McDonnell said his plan wasn’t just about relocating the Treasury unit but “relocating decision-making as well”.
He said: “The National Transformation Fund, that’ll be done by a unit in Number 11. But we’re going to devolve Number 11. We’re going to locate this in the North.
“What we’re saying is, if we’re going to address regional inequalities, the NTF is one of the big vehicles for doing that. Large amounts of that money will go to the North, so therefore, the best thing to do is to put the administrators in the North.”
He added: “Now, the idea behind it is that the criteria is going to be used for it is about tackling climate change, about tackling regional inequalities and it’s also about investing in the fourth industrial revolution.
“If the money is going to the north, locate the unit that’s going to advise on how that’s done in the North. There’ll be a unit in the Treasury that will manage that, and that unit will go North, devolved, split.
“Of course it’s important where decisions are made. It’s part of the environment, you’ll be picking up intelligence about what’s going on on the ground.”
Large parts of the North now have metro mayors as a result of former Chancellor George Osborne’s Northern Powerhouse agenda. But Yorkshire has yet to fully implement a devolution deal.
Mr McDonnell said that if the new arm of the Treasury moves to the North, Labour would want “to devolve the decision-making to the regional and local level”.
“I’m meeting with all the mayors and we’re going to be asking them what sort of structures they think is best both in terms of their individual decision-making - so when they bid for resources, not just bidding for individual projects but pots of money as well - but also how they think it’s best to coordinate across the North.
“But actually the relocation of parts of Number 11 I think is significant, because you do want the civil servants meeting up with businesses and civic leaders and others. People need to know what lives people are living in those areas.”
Revamp of Treasury rules
The Shadow Chancellor has pledged a “complete revamp” of the Treasury’s Green Book rules which govern how decisions on spending are made.
Critics including Greater Manchester metro mayor Andy Burnham have argued that the ‘value for money’ criteria used for transport infrastructure spending disadvantages the North by prioritising better performing areas.
Mr McDonnell said: “So on the Green Book at the moment, we’re doing a complete revamp.
“I’ve written to the Permanent Secretary of the Treasury, saying that these are all new priorities, get used to it. In all the meetings we’ve done, people are buzzing with ideas.”
Speaking to The Yorkshire Post on Saturday, Tory leadership frontrunner Boris Johnson hinted that he would rip up the same funding rules in order to spend more money outside of London and the South-East, if he becomes Prime Minister.
Northern Powerhouse Minister and close ally of Mr Johnson, Jake Berry, last month called for spending rules to be relaxed in order to rebalance Britain’s economy.
Asked if he agreed with Mr Berry’s assessment, Mr Johnson said: “I wouldn’t want to dissent from whatever Jake said to you. I don’t know exactly what he said but it sounds very sensible.”