David Cameron has failed to end the Tories' image as the party of the rich and is paying the price as Conservatives struggle to extend their appeal to urban areas in the north of England, according to the head of Downing Street's favourite thinktank.

In a searing critique of the prime minister's faltering modernisation project, the director of Policy Exchange, Neil O'Brien, calls for an urgent round of renewal in the light of Cameron's failure to heal the "party's worst wounds".

Writing for the Guardian on the eve of the Conservative conference in Birmingham, O'Brien says: "The Tories urgently need a new round of renewal. Tory modernisation has not yet healed the party's worst wounds. It is still seen as the party of the rich. It does badly in urban areas, particularly outside the south-east."

The intervention by O'Brien, whose thinktank has been an intellectual powerhouse for so-called "Cameroons", reflects the concerns among many modernisers that the project to detoxify the image of the Tories has stalled. It was designed to show that the Tories, who were famously described in 2002 by Theresa May, now the home secretary, as the "nasty party", reflected modern, diverse Britain. Cameron famously broke with the past, and highlighted his green credentials, by posing with huskies on a visit to Svalbard in the Norwegian Arctic in 2006.

On Friday, in another blow for the government, Europe's environment chief highlighted concerns in the EU that the coalition is failing to live up to its pledge to become Britain's greenest ever government by accusing critics of environmental regulations of making "untrue" claims.

Janez Potocnik, the European environment commissioner, told the Guardian that for politicians to suggest that environmental legislation was a burden was "very unhelpful, because it is untrue".

The commissioner did not name any Tory ministers. But chancellor George Osborne has criticised green regulations.

Separately, in a Guardian interview before the Conservative conference, the new culture secretary, Maria Miller, claimed the government was acting in a progressive way as it lifts 2 million of the lowest earners out of tax.

Miller, who is also minister for women and equalities, said: "When you look at what we have been doing for the last two and a half years, so much of it does resonate with women. If you look at what we have done in terms of focusing on cutting the deficit, welfare reform and tax reforms – lifting 2 million of the lowest paid people out of tax altogether disproportionately supports women who can often have part-time jobs."

Miller declined to join the campaign to end the Sun's Page 3 girl, saying: "It is for newspapers to decide what they print and it is for consumers to decide what they buy. That is the way it should be, and I don't think it is right for ministers to dictate what goes on any page of a newspaper, whether it is page 3 or not."

In his Guardian article, O'Brien calls for "blue collar modernisation" focused on the north and the Midlands which would see the end of middle-class benefits. "What about middle-class benefits?" he asks. "Do we really need to give child benefit to households that are better off than average? Post-election we should stop giving free TV licences, winter fuel payments and bus passes to millionaires."

O'Brien says the prime minister must resist calls from the Tory right, notably the new Conservative Voice group, to champion a more traditional agenda.

"Obviously Cameron should ignore calls from the usual suspects to lurch rightward. But the solution isn't as simple as tacking to the centre. After all, most voters have tough views on crime, welfare and immigration. What's needed is a blue-collar modernisation, focused on the north and Midlands."

Amid continuing concerns about the failure of the Tory party to appeal to British minority ethnic communities, O'Brien calls on the prime minister to renounce the so called "cricket test" set by Lord Tebbit. The former Tory chairman famously said in 1990 that members of minority communities could not be considered fully British if they supported the cricket team of their country of ancestry rather than England.

"Supporting Pakistan or the Windies at cricket is no more evidence that someone has failed to integrate than wearing a kilt to a wedding is proof of Jacobite sympathies. You can be intensely British, but want to hold on to your family history."

The prime minister will on Saturday try to draw a line under one issue that harmed the Tory brand – Andrew Lansley's health reforms – when he unveils a £140m fund to help reduce paperwork.

In a visit to a hospital, Cameron will announce that £100m will be invested in new software to cut form filling and £40m to train 10,000 nurses and midwives for greater leadership roles in the NHS.

In marked contrast with Lansley, who found himself at odds with most professional medical bodies, the new health secretary, Jeremy Hunt, will say: "The importance of these issues was laid bare by doctors' and nursing leaders this week. The government's role is to listen to the NHS and support these leaders – that's what we're doing today."