This paper has been written by Nicola Bacon, with inputs from Vicki Savage, Corinne Cordes, Brigitte Gohdes, Neil Reeder and Geoff Mulgan. It has emerged from our work on progress on a number of different programmes.

The UK public sector is facing budget reductions that dwarf any of the efficiency drives experienced in the last decade. Cuts are inevitable. They are likely to be deep, painful and sustained over several years. They are threatened at a time when the social consequences of recession are sharply felt, and the pressures of social need on the public sector are unlikely to fall for some years.

There is widespread awareness that the scale of budget cuts needed is beyond the domain of what can be delivered by traditional efficiency programmes. The key questions are how to manage the approach to efficiency? How to make sure that money is saved whilst doing as little damage as possible to organisational capacity and the delivery of priority outcomes? How to make sure that the services that remain meet the changing needs of different places and the people who live there? And how to make sure that the focus of budget cuts translates into new ways of providing services and frees up creativity to find fresh approaches to old problems?

The history of local government over the past century is in many ways a history of decline. The sector's scale of operation and remit has shrunk as central government, and other institutions (in the public and private sector) have taken on more functions formerly directly provided by councils, including house building, housing management, direct management of schools, even electricity generation and water supply going back further into the past. As the size of the local state has diminished, so too it seems has its legitimacy. One cause of the loss of power of the local government sector has been a direct result of a failure to innovate, to find fresh new solutions that provide services through new, cheaper and more effective approaches.

In November 2009, Bank of England Executive Director for Financial Stability Andy Haldane warned of a "doom loop" in the financial markets: as the state bailed out banks without curbing the excesses that had created the conditions for the credit crunch, the scene was being set for future crisis, and future calls for state intervention.

Is there a parallel for local government? As spending falls, will local government fail to meet the challenge of delivering "more for less"? If this leads to loss of faith by public and politicians (an overall fall in legitimacy), central government's settlements may further reduce. With even small budgets, and remits, the sector's legitimacy can slump even further - creating a downwards spiral. Is this the "doom loop" for local government?

If local government could not significantly improve outcomes for residents in many priority areas in the last decade of plenty, can it meet the challenge of spending cuts?

Download a full pdf version of the report.

Please contact nicola.bacon@youngfoundation.org for more information.