Children in care who experience delays and disruption are more likely to develop mental health and behaviour problems, and cost the state up to £32,755 a year more than children who have positive experiences in care, according to a new report.

The study, by the think-tank Demos, calls for more early intervention in troubled families, arguing that delays in removing the most vulnerable children from their birth families are associated with poor mental health and behaviour. This early damage to a child significantly reduces their chances of being adopted or securing a long-term foster placement and means that they are much more likely to need extensive – and costly – support through life.

The report, In Loco Parentis, funded by children's charity Barnardo's, calls on the care system to be "more proactive", arguing that the potential emotional and financial savings to be made are "considerable". Its publication comes as the care population in England and Wales has risen close to 61,000 following the death of Baby Peter. That case led to an immediate 40 per cent surge in referrals to the courts to take children into care. The latest public sector cuts make it likely that social services departments will be expected to do more with less.

The report argues that care must be de-stigmatised. Used wisely, it says, care can be a positive experience for many children. It calls for care to be used as a "parallel parent" for children and families who need such help.

A chronic shortage of foster carers is also leading to disruption and instability for children.

The authors call for more support for young people leaving the care system and a rise in the care leaving age to 18, with a "right to remain" until 21 and a "right to return" up to 24.

Martin Narey, chief executive of Barnardo's, said: "Contrary to popular belief, and for all its inadequacies, care does make things better and can and does create stable, nurturing environments for children. We must urgently adopt a more pro-active and positive use of care."