George Osborne says Britain should start making plans for a new high speed rail link connecting Manchester to Leeds that would create a new “north global powerhouse”.

Plans are sketchy, but the chancellor said they would likely incorporate upgrades to existing lines with new tunnel networks and improved infrastructure to allow for faster connections.

He said the project would cost £7 billion, but could be cheaper depending on the use of existing lines.

He said: “Today I want us to start thinking about whether to build a new high speed rail connection east-west from Manchester to Leeds. Based on the existing rail route, but speeded up with new tunnels and infrastructure. A third high speed railway for Britain.”

Britain already has two high-speed rail projects under way: a stretch of track connecting London to the mouth of the Channel Tunnel, or HS1, and a service initially connecting Birmingham to London – HS2.

The plans were given a cautious welcome by business groups, although they added that more detail was needed.

Katja Hall, CBI deputy director-general, said: “To keep the wheels on the recovery turning, we need to maximise growth across the UK. Better east-west links in the north could provide a huge boost to local businesses, and help further balance the UK economy by creating a northern hub."

The chancellor also unveiled plans for more devolved government in northern cities with mayors in cities like Manchester, Liverpool and Leeds. These would have similar powers to Boris Johnson, London’s mayor.