She will have overall responsibility for oversight of public spending on education and children; health; housing, communities and local government; and the UK's devolved countries and regions - representing in total over£250bn a year of public spending.
Second permanent secretary John Kingman said: "Helen brings a strong track record of experience of public services at the sharp end."
Ms Bailey said: "I look forward to bringing my practical experience of Islington to delivering public services in this strategic role."
Ms Bailey has been at Islington since 2000 and chief executive since 2002, prior to which she was a management consultant with companies including PricewaterhouseCoopers. She started her career with the Greater London Council and subsequently worked in a range of public service delivery organisations as a manager and consultant.
She succeeds Ray Shostak, now head of the Prime Minister's Delivery Unit (PMDU).