The economic fortunes of Britain’s smaller towns are set to fall further behind those of the biggest cities over the next three years, according to a report urging radical steps to tackle regional divisions.

Economic imbalances between the north and south of England are expected to widen until 2023 unless greater action is taken, forecasts from the accountancy firm EY show. Small towns across the north-east, Yorkshire and the West Midlands are expected to be worst hit by the widening gap.

Published ahead of next month’s budget, and as Boris Johnson promises to raise government spending outside of London and the south-east, the forecast for regional economic growth found that employment in the country’s biggest cities was set to grow at twice the rate of that in towns.

Should the current trajectory be maintained, EY said the capital, the south-east and the east of England would be the three fastest growing regions, while the north-east, Yorkshire and the south-west would be the slowest.

Mark Gregory, the chief economist at EY who also acts as an adviser to the Centre for Towns thinktank chaired by the Labour leadership candidate Lisa Nandy, said the UK was one of the most regionally unbalanced developed economies in the world.

Despite the launch of at least 40 different policy initiatives to boost regional activity over the last half-century, he said growth had become more concentrated in London and the south-east since 1997. “If we are to succeed in ‘levelling-up’ the economy, a more radical and segmented approach is now urgently required,” he added.

The report comes against a backdrop of mounting calls from across the political divide to rebalance the economy. Nandy’s leadership campaign has focused on winning back votes in northern towns across the “red wall”, where voters deserted Labour and backed Tory MPs for the first time ever.

Despite forecasting faster growth in some northern and Midlands cities, including Manchester and Nottingham, EY warned that many smaller towns were likely to be increasingly left behind. It said that gross value added (GVA), which measures the increase in the value of the economy that results from the production of goods and services, was due to grow at 2.2% annually on average in the largest cities, compared with 1.6% for towns.

Urging the government to tackle gaps in prosperity within regions rather than just between London and the rest of the nation, it warned that towns in the north-east and Yorkshire would grow at just 1.1% over the next three years, falling behind the growth rates of their biggest cities – with Newcastle expected to grow by 1.7% and Leeds by 1.9%.

Manchester is expected to top the table for job creation over the next three years, with the number of people entering the workforce growing at an average of 1.4% a year. Meanwhile, the broader north-west region is expected to record jobs growth of just 0.3% annually, in line with the slowest-growing town labour markets.

The report warned that a growing number of job opportunities in cities could lead to further weakening of the economies of towns, as people either relocate or commute elsewhere.

EY said rebalancing the economy should become central for government, rather than a separate strand of activity, and that policies to boost growth and jobs outside of big cities should be based on local priorities, rather than “top-down” initiatives.

Mark Gregory said: “Encouragingly there appears to be a strong consensus that regional disparities need be addressed. But our forecast shows the scale of the task facing government in seeking to ‘level up’ the country and just how important the policy announcements in the budget will be.”