Asked what is wrong with Liverpool, Dr Leunig added: “People aren’t starving, but you’re quite a lot poorer than the rest of the UK and you’re not closing the gap and that’s with a lot of regeneration funding.

“I think there could be hard times yet for Liverpool. Don’t get me wrong, I wish I was wrong.

“I would love Liverpool to be as rich as the rest of the country.”

If the policies suggested in his report became reality, Dr Leunig said he would expect the city region’s population to fall by around 50% over the next five decades.

However, the remaining population would live in larger houses and have more open space.

He and co-authors Dr Oliver Marc Hartwich and James Swaffield – whose parents are from Merseyside – are urging policy-makers to ditch plans such as the Housing Market Renewal Initiative, which aims to demolish and refurbish old housing stock, building new homes in its place.

They say the Government should buy vacant houses and give them to their neighbours in return for a share in the larger property. Some of the industry currently housed in London would move to Merseyside as it made way for the 1m extra houses to be built in the capital, they claim.

Oxford and Cambridge – as research centres – should each swell by another 1m properties each.

Dr Leunig, who said he couldn’t remember the last time he visited Merseyside, advised a moratorium on building homes in the region.

He said: “You don’t really want to be building additional houses in Liverpool – that’s not sensible.

“It costs the same to build a house in Oxford but it’s worth more.

“I’m sure if you offer people a house in Cambridge for the same price as their house in Liverpool, a lot of people would jump at the chance because you’re more likely to get a job in Cambridge and it’s more likely to be higher paid.”

He added: “People may prefer to be unemployed in Liverpool than employed in Basingstoke. But I think people want to have a job.”

As for the Capital of Culture boost, Dr Leunig said although the city centre “looks great now, I wonder, in five years’ time, how many of these things will still matter”.

The report’s authors were last night at the centre of a whirlwind of criticism.

Cllr Warren Bradley, leader of Liverpool city council said: “The past decade has seen unprece-dented growth in Liverpool’s economy, which has surpassed many southern towns and cities. Millions of visitors during our Capital of Culture year have seen for themselves the massive investment which is trans-forming Liverpool into a top European city.

“Even the report’s authors said it was likely to be dismissed as barmy. It’s the only thing they got right.”

Liverpool Riverside MP Louise Ellman added: “This report from David Cameron’s favourite think tank has just dismissed a huge area of the country as worthless.

“Is it any wonder there are no Tory councillors in Liverpool when for all their warm words they have not changed a bit?

“Liverpool is an excellent example of a city regenera-ting fast – with unemploy-ment halved and increasing inward investment in the year we celebrate being European Capital of Culture, we should be talking up our city not doing it down.”

Who are policy exchange?

THE report’s authors:

Dr Tim Leunig is lecturer in economic history at the London School of Economics.

He wrote his Phd on the Lancashire cotton industry and has advised Parliament, the Treasury and the Department for Transport.

James Swaffield is a research fellow at Policy Exchange carrying out research on cities and urban policy.

Dr Oliver Marc Hartwich is chief economist at the think tank with responsibility for economic competitiveness.

Policy Exchange’s Trustees:

Charles Moore: chair of the board of trustees. He is a former editor of the Daily Telegraph and Spectator columnist.

Rachel Whetstone: former-Conservative leader Michael Howard’s chief of staff while he led the party. She is Godmother to David Cameron’s son Ivan.

Theodore Agnew: donated £50,000 to Conservative Central Office in February.

Richard Briance: deputy chairman of Hawkpoint Partners, a leading city corporate finance advisory firm and has donated £11,900 to the Conservatives since 2002.

Richard Ehrman: special adviser to the Employment Department in the 1980s and was chief leader writer at the Telegraph in the 1990s.

The other trustees are Camilla Cavendish, Robin Edwards, Virginia Fraser, George Robinson, Andrew Sells, Tim Steel and Alice Thomson.

Download the full report as a PDF file here