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Children's services have threatened to swallow council budgets as demand has soared and costs have ballooned. Recent weeks have seen the first moves by governments to tackle the issue.In England, the Children's Wellbeing and Schools Bill gained Royal Assent last week, while the phasing out of for-profit services in Wales began last month.But the challenge they face is stark. A report by the Institute for Government (IfG) published last week found there were 6,400 more children in care in 2025 than in 2018, yet 1,300 fewer fostering households. Demand for children's homes outstripped local capacity at a third of councils, leading to them making out-of-area placements.This scarcity of provision has impacted on finances. The average cost of a children's home placement was more than £400,000 per year in 2024-25 – 64% more in real terms than in 2016-17.Government research has uncovered a concentration of ownership in children's services. In England, a quarter of all children's homes were owned by just 20 providers, with the top two accounting for 9% in 2025 according to latest figures from the Department for Education (DfE). Similarly, six owners of independent fostering agencies accounted for almost 20% of places.The Centre for Local Economies (CLES) has warned of the potential pitfalls of private equity and hedge fund ownership, with half of the 20 largest children's homes and fostering providers having such owners.While able to achieve economies of scale, the think-tank said both models incentivised ‘rapid profit growth rather than long-term stability'.CLES analysis found the 15 largest providers in the children's home sector make an average of 23% profit per year.This tended to be channelled into dividends and director salaries rather than reinvested, and there was further potential to extract money through property rents and management fees.CLES associate director Leah Millthorne said: ‘The vast majority of local authority budgets is spent on care services, but far too much of it is leaking out of the system, extracted as profit and investor returns, instead of providing better services and fair pay for workers.'Ofsted has voiced concern over the concentration of homes in areas such as the North West, while leaving those such as London, with a dire shortage.The watchdog's latest annual report stated: ‘The proliferation of children's homes in areas where housing is cheaper suggests some operators are being motivated by profit, rather than the needs of children, which is bending the entire system out of shape.'This contributes to a ‘shadow market' of unregistered homes ‘which often charge exorbitant fees to local authorities that have run out of options', the report added.Chief inspector Sir Martyn Oliver said: ‘The most vulnerable children in our society deserve loving and stable homes. Instead, profit motive is increasingly dictating the location and ownership of children's homes.'Governments have recognised the threat to council budgets and are mobilising to take action.The SNP administration in Scotland had outlined plans to limit profits in the sector prior to this week's Holyrood elections. Then-children and young people minister, Natalie Don-Innes, said the aim was to ‘strike a balance between reducing excessive profit in residential childcare while ensuring vital services for children are maintained'.Wales passed legislation last year to become the first UK nation to end private profit in children's residential and foster care. New provision will be limited to public sector, charitable or not-for-profit organisations.A ban on registration of new private providers came into effect last month, which will be followed by a ban on the expansion of existing private homes from 2027. Councils will require ministerial approval for placements in for-profit providers from 2030.There are suggestions reforms have resulted in an inflation in the cost of placements in the short term. The Children's Home Association, which represents providers, has warned of disruption and unintended consequences arising from the legislation, arguing there was no funding figure or costed implementation plan in the last Welsh Government Budget.The body has pressed for the removal of barriers it says are holding up the supply of more places, which would help bring down costs and reduce out-of-area placements. It has called for priority planning status for children's homes in areas of need, regional sufficiency plans, and the fast-tracking of registration where there is a gap in provision, to be based on independent analysis.In Westminster, the Children's Wellbeing and Schools Bill – now an official Act –also contains measures enabling a profit cap.Speaking as it was completing its passage through Parliament last week, education minister Olivia Bailey said it was ‘about keeping children safe, ensuring that no child is let down by the system, and ensuring that children in care get the support and love they deserve'.The DfE is also running Regional Care Co-operatives to plan, commission and deliver care places in two pathfinder regions – Greater Manchester and the South East.IfG has welcomed the co-operatives, but said they must have the ‘funding, analytical capacity and data' in order to forecast demand. This also needed to be accompanied by better data on preventative children's services. It also advocates changes to funding structures and providing incentives to help co-ordinate support for children.IfG researcher Amber Dellar said: ‘The Government's reforms to children's social care are ambitious and relatively well-funded – but the foundations for success are missing. Local areas still lack the tools to prevent children entering care. Services across health, justice and social care are not set up to work together.'CLES has similarly welcomed the co-operative pilots and called for an extension of ‘sectoral bargaining models' and enlisting strategic authorities to play a role.The think-tank is also pressing for the Government to build on changes to procurement rules that have seen a shift to recognising ‘public value' in addition to value for money in contracts.This would help insourcing, social enterprises, co-operatives and community-led models to compete with for-profit providers. Millthorne said this could help ensure ‘local authority contracts go to organisations that reinvest in care, not investors'.

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CHILDREN'S SERVICES

Breaking point: Tough choices for childrens' services

By Martin Ford | 06 May 2026

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