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Local authorities are turning themselves into engines of innovation as austerity spurs a wave of entrepreneurial thinking among cash-strapped English councils.

From Suffolk to Kent, councils are setting themselves up as trading companies, redefining themselves as commissioners, rather than providers, of services or learning to work with different parts of the public sector, transcending once once-rigid divisions.

Research conducted by Localis, a local government think-tank, has found that almost all now share some services with another council, more than half own a trading company and, on the current trajectory, by the end of the decade all will do so.

During the past five years, councils have proved themselves the most consistently radical and enterprising part of the public sector, argues Andrew Haldenby, director of Reform, a pro-market think-tank.

“Councils are setting the pace because they have faced tough finances for longer. They are more confident than central government in outsourcing, merging the back office and joining up front-line services,” he adds.

Behind this new spirit of inventiveness lie freedoms granted during the five years of coalition government.

Alex Thomson, chief executive of Localis, who advised David Cameron in opposition, says: “For a long time local government was essentially an arm of central government. It was a delivery arm. It had some autonomy, but it had been conditioned not to use much of it.”

However, changes that have allowed councils to keep more of the business rates they raise, and to earn a “new homes bonus” in return for housebuilding, have created incentives for councils to change the way they work.

The potential of this activity to help keep councils afloat will be tested in the next five years, as they brace for further cuts in the autumn spending review.

From 2000 to 2010, local government benefited from Labour’s public sector spending outlay, seeing its share of GDP rise from 8.3 per cent to 10.1 per cent. However, by 2013 it had fallen back to 8.7 per cent.

Lord Kerslake, who presided over the first round of reductions as then-permanent secretary at the communities and local government department, responded to the Financial Times’ “sobering” analysis of the impact of the cuts by warning of “the risks of serious service and financial failure by some local authorities unless there is a comprehensive review of local authority funding in the round”.

In a once-monolithic sector, experimentation has become the order of the day. Manchester broke new ground this year when it was granted dominion over the budget for NHS and social care, potentially putting the council of the future at the forefront of reforming the UK’s public services.

Councils may be reduced in size but become larger in scope and ambition, suggests Mr Thomson. “It could be much smaller in terms of staff, but covering a whole range of different services and geographies . . . and [have] a massive part in fostering growth in each local area,” he says.

However, the notion that the sector has cried wolf hovers over much of the debate within government, reinforced by data suggesting that two out of three people have not noticed any cuts to their local services.

The FT’s analysis of council spending data shows the role played by efficiency savings during the past five years.

Between 2009/10 and 2013/14 English councils reduced their spending on overheads by 19 per cent to £7.8bn — about 10 per cent of their total spending and a similar proportion to overheads spending in 2009/10.

However, councils argue that the potential of efficiencies has been substantially exhausted, putting an onus on them to find new ways of working that will allow them to live permanently within smaller budgets.

Suffolk became an early emblem of the new, austerity-driven radicalism when it decided to outsource almost all its services to private providers.

Colin Noble, council leader, says the council was lambasted as a no-frills “EasyCouncil” but believed its approach was key to avoiding “salami-slicing” of services. “We transferred 4,500 staff out of direct council employment . . . and saved ourselves £7.5m,” he told the Local Government Association annual conference this month.

It has proved far from plain sailing — care homes outsourced to a private provider are under scrutiny by the inspectorate, the Care Quality Commission, for example — but he stands by its essential approach.

“It’s been about delivering more service for less money,” he told the FT.

Perhaps the most evolved version of council-as-moneymaker is Kent county council’s commercial and traded services business. Covering activities from education supplies to legal services, it turns over more than £400m in revenue and brokerage charges, and is the largest public sector trading organisation in Europe.

As the council ponders further spin outs, Bryan Sweetland, a Kent council cabinet member, says even council staff who do not work for one of the new entities have acquired a far more commercial attitude, tending to see themselves as “profit centres rather than cost centres”.

For all the pressures with which local councils are struggling, Gary Porter, the Conservative head of the Local Government Association, remains “enthusiastic for the future”.

“Anybody can lead a council in the good times, you’ve only got to be half sensible and you’ll survive,” he said. “The hard times are when the really good people start to shine.”

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