The Department for Business, Innovation and Skills (BIS) has announced plans to close its largest office outside of London, calling into question the Chancellor's promise of a "Northern Economic Powerhouse".

BIS permanent secretary Martin Donnelly told 240 staff at the BIS office in Sheffield that it would be closed by 2018.

The closure is part of plans to cost the department's costs by 2020. Instead, the department will create a combined headquarters and policy office in London, making it easier for ministers to speak to policy staff.

Mr Donnelly said: “Our operating model needs to be designed in a way that works for this smaller workforce with more streamlined structures."

He added: “The decision to close Sheffield by 2018 has not been taken lightly. The unions are being consulted and will be involved throughout the process. It is my top priority that all our staff are fully briefed and consulted on the process. We will provide comprehensive support to all those facing a potential change or loss of job.”

The closure of the Sheffield office, the largest outside of the capital, has led to questions over George Osborne's commitment to developing the 'Northern Powerhouse'.

Labour MP for Sheffield Central, Paul Blomfield, said: "The north needs jobs and London’s overheating. This move makes no sense and it exposes Osborne’s empty rhetoric of the northern powerhouse once again. I’ve pressed ministers to move public sector jobs out of London, as Labour did, and I’ll be challenging this decision at every opportunity.”

The Institute for Goverment, the percentage of civil servants based in London has grown from 16% to 18% since the Chancellor took office in 2010.

However, staff have been told that despite the closure of Sheffield, BIS plans to open six offices across the country. And internal document read: "Even with the movement of policy roles to London, our overall London footprint will decrease by 2020. “We have, and will continue to have, many more people based outside London than inside London.”

Harry Harpham, Labour MP for Sheffield Brightside, said: “It’s no wonder people are questioning whether George Osborne’s so-called northern powerhouse really means anything. We’ve had the flash press statements and photo ops, but when actual jobs are on the line we see that the government’s rhetoric is just hot air."