Manchester is to get its own directly elected mayor with powers over transport, housing, planning and policing, under plans unveiled by George Osborne on Monday.

“Devo Manc” is the latest initiative in the chancellor’s plan to create a “northern powerhouse” to rival London, with other cities expected to follow.

The plans would see the post of police and crime commissioner for Greater Manchester police – established by the coalition government – scrapped and replaced by an elected mayor, while further powers would be devolved to the Greater Manchester combined authority (GMCA), including some control over business growth as well as health and social care budgets.

The GMCA eventually hopes for full devolution of all £22bn of public spending in the city.

“This is a massive moment for the north of England and our plan to build the northern powerhouse,” said the chancellor. “After several months of private discussions with local representatives from all three parties, I have reached agreement with the civic leaders of Greater Manchester to create the first metro-wide elected mayor outside of London.

“This will give Mancunians a powerful voice and bring practical improvements for local people, with better transport links, an Oyster-style travelcard and more investment in skills and the city’s economy. I want to talk to other cities who are keen to follow Manchester’s lead – every city is different and no model of local power will be the same.”

Osborne said there were further plans to make investments in northern transport and science. “This is what we’ve achieved in just a few months. Giving cities power is part of our long-term economic plan to reduce the decades-old gap between north and south, London and the rest.”

The directly elected mayor of Greater Manchester would gain control of a £300m housing investment fund, powers over strategic planning, responsibility for franchised bus services and for integrated transport ticketing along the lines of London’s Oyster card. The GMCA is to take over responsibility for business support and power to restructure further education.

The government is to legislate to enable the changes, with the mayoral election potentially taking place in 2017.

The mayoralty is the latest in a line of announcements on northern England from the chancellor’s office. Last week, Osborne announced plans to develop HS3, a new high-speed rail link designed to improve east-west transport links. In August, he announced plans for a National Institute for Materials Research and Innovation in the north of England and a £60m Graphene Engineering Innovation Centre in Manchester.

Lord Smith, chair of the GMCA, said the settlement was a momentous moment for Greater Manchester. “It gives us greater control over our own destiny in several key areas and the ability to base decisions on local priorities and needs, rather than on ‘one size fits all’ dictates from Westminster,” he said.

“This isn’t about taking powers from individual Greater Manchester authorities. It’s about powers coming down from central government to a more localised level.”

Sir Richard Leese, leader of Manchester city council, said an over-centralised national system had not delivered the best results for the people and economy of the north, but the Devo Manc settlement had shifted the debate. “We are extremely pleased that we can now demonstrate what a city region with greater freedoms can achieve and contribute further to the growth of the UK,” he said.

“Our ultimate ambition is for full devolution of all public spending in Greater Manchester, currently around £22bn a year, so that we either influence or control the whole amount. We recognise that this cannot happen overnight and there needs to be a staged approach based on evidence that devolution delivers increased economic growth and better public services. But today’s settlement is a huge move forwards and a road map for the future.”