Simon Parker is Director of the New Local Government Network.

David Cameron’s new government has the inbox from hell. The prime minister must navigate a series of deeply divisive debates about Britain’s relationship with the EU, dramatically trim the benefits bill and simultaneously cut billions from day-to-day public spending while finding billions more for the NHS. Why, then, is the new government’s first major act to trumpet the devolution of power to the northern cities?

Cynics will come up with all sorts of reasons. Yes, devolution is a cheap promise to make and the budgets that cities receive are often trimmed on their way from Whitehall to town hall. And yes, the Tories need to reach out to the north electorally. But there is something bigger going on here. Right from the start, Cameron and Osborne had a vision of a different kind of state. Now, as a majority government, they are going to build it.

The idea that underpins the new state is simple but powerful: a shift away from redistributing money to meet social need, and towards making towns and cities self-sufficient, giving them the powers to drive growth and using the proceeds of that growth to support the elderly and vulnerable. This does not mean that the Conservatives don’t care about redistribution – a country as geographically unequal as the UK needs a way to shift money from rich to poor – but it does mean a world in which councils control more services, and the amount they can spend on those services is more closely related to the vibrancy of the local economy. This sounds simple, but in truth it is a gigantic philosophical shift from the Labour years.

It is a vision of the future that is already being built in Greater Manchester. The city currently spends about £21 billion a year and raises £17 billion in tax. Its leaders have a commitment to making those two figures balance. They reason that they can use their new powers of infrastructure and public investment to create more high quality jobs, then use their control over healthcare spending and employability services to lift the low skilled and vulnerable into those new jobs. Get this right and you achieve a virtuous cycle of economic and social growth that will not solve the problem of public sector cuts, but can certainly help the city to cope.

Manchester is leading the way, but conurbations such as West Yorkshire, Greater Sheffield and Greater Birmingham are queuing up to follow. Yet Osborne’s powerful vision of a new devolved Britain remains fragile. To entrench it, he will need to deliver a number of significant policy changes, some of which may prove profoundly uncomfortable for his party.

The first challenge is the chancellor’s insistence that major new devolved powers will only go to those cities that adopt Boris-style metro mayors. It is absolutely right that major new powers need major new accountability, but nowhere outside Manchester is ready to take that step yet. Unless that changes, the pace of devolution could be slow. Neither does the chancellor have an answer to how the benefits of devolution will be extended to the Conservative heartlands in the shires. Ironically, his policies are doing more to benefit Labour-controlled cities than Conservative county councils. This must surely be corrected.

Finally, the chancellor needs to consider the money. Osborne’s vision of independent city states only works if councils can really keep a big slice of the proceeds of local economic growth. At present, city finances are tightly controlled from Whitehall and most of the benefits of creating new jobs accrue to central government. Whether it is returning control of business rates, removing council tax referendums or assigning cities a greater share of the income tax they generate, the chancellor needs proposals for change. Too many cities are currently fighting a losing battle against deep central government cuts: they need a realistic way out that is fair to their local populations as both users and funders of public services.

The good news is that Cameron’s new communities secretary, Greg Clark, is widely regarded as a thoughtful and passionate advocate for devolution. The revolution has started, but there is a lot more thinking for the Conservatives to do before it can be finished.