After five years presiding over the borough's transformation from 'poor' to three-star under the comprehensive performance assessment, Ms Bailey is to become public services director at the Treasury.
The move, announced this week, will result in Ms Bailey overseeing£250bn in annual spending on local government, schools and education, health, housing and communities.
Ms Bailey said she was delighted to be staying in the public sector, but doing something very different. She said: "The scale of the job is overwhelming and what I don't yet know is how I'm going to use my experience of being a chief executive in my new role."
Merrick Cockell (Con), chair of London Councils, said he hoped Ms Bailey's appointment would bring more inside knowledge of local government to the department.
"In the past, the Treasury has been seen as not being that aware of the realities of life for local government," he said.
David Clark, director general of the Society of Local Authority Chief Executives & Senior Managers, said the appointment was another vote of confidence in local government after outgoing Sheffield City Council chief executive Sir Robert Kerslake was made chief of the Homes & Communities Agency. "The Treasury will now have someone in the role with real practical experience," he added.
John Kingman, second permanent secretary at the Treasury, said: "She brings a strong track record of experience of public services at the sharp end." Ms Bailey will replace Ray Shostak, a former children's services director at Hertfordshire CC.