Public spending cuts only threaten to make an already fragile situation worse and put the welfare of the most vulnerable children at risk, warns the report by the Fostering Network, which is entitled Bursting at the Seams.
It reveals that the care system is under extreme pressure following the unprecedented rise in children being taken into care since the death of Peter Connelly in 2007. The report found that almost six in 10 local authorities are having difficulty in finding the right homes for children, with only a third reporting that they had been able to find appropriate placements.
In some areas there are simply no spare beds left, the survey of 76 fostering services and 307 foster carers found. Children are being sent further away from their schools and friends and sometimes to foster carers who do not have the skills and experience to deal with the child's specific needs.
Some local authorities reported that the situation was "the worst it had ever been" and called for immediate action to stop the collapse of the system.
"Since the tragic case of Baby Peter's death came to public attention in late 2008, the care system has seen an unprecedented rise in the number of children, in particular those needing foster placements," the report said.
The number of requests to take children into care has risen by more than a third in a year from 6,488 in 2008-09 to 8,684 in 2009-10, according to figures released by Cafcass, the organisation that represents children's interests in the family courts.
The Local Government Association (LGA) has estimated that this increase will have cost the taxpayer an additional £226m in 2009-10. This includes £39m in court costs and £187m spent on looking after children in local authority care.
There is already a shortage of 10,000 foster parents, and a demographic time bomb means that two-thirds of current carers are approaching retirement.
The vast majority of fostering services said they had been forced to ask carers to look after extra children because of difficulties in finding placements. Many local authorities have also started to bend the rules to allow carers to take on more children.
Staff said they feared they were "taking advantage" of the good will of foster carers, saying that few would find it easy to decline a placement when they knew a child might have nowhere else to go. One said: "I am very worried about our capacity to cope for much longer."
New foster carers are also being asked to take more challenging children for their first placements, when previously they would have been given time to gain experience. As a result, the placements are more likely to break down.
Helen Clarke, the author of the report, said: "While fostering services had made real progress in recruiting more foster carers and finding children the right foster homes, the unprecedented pressure the system is now under has clearly pushed back much of this good work.
"The impact of the rise in children needing foster homes and the shortage of foster carers means the system is no longer sustainable and budget cuts could be devastating."
The British Association for Adoption and Fostering warned that local authority budget cuts could jeopardise the wellbeing of the most vulnerable children.
"The care system is doing remarkable work in providing security, safety and care for children in the most difficult circumstances. We must ensure that it is protected from any cuts," said David Holmes, its chief executive.
Kim Bromley-Derry, president of the Association of Directors of Children's Services, said there had been a rise in demand for members' services across the country – a trend mirrored by the rise in care cases.
John Ransford, chief executive of the LGA, said: "The system which looks after children in care is feeling the strain – it was never designed to deal with the increase in numbers which we have experienced in the last couple of years.
"There is no question of money being a factor in deciding how a vulnerable child is cared for. Wherever a child is identified as being in danger, councils and the courts will take them out of the family home if that is the best way of protecting them."
Case study: 'We're amazed at the mismatching'
Caroline March, 47, has been a foster carer for seven years but over the past two years has witnessed the extreme pressures the care system is under.
Mrs March, from Ceredigion in West Wales, is registered to care for up to three children and has fostered two brothers – who are now aged 16 and 14 – over the last six years. She has become increasingly concerned that she has been allocated children with severe and complex difficulties for her third place.
"We said we couldn't take the new child because of the impact it could have on the boys already here," she said. "Shortly afterwards we were asked to take another child, which we agreed to. However, we were not given full background information about him, or support when the arrangement proved difficult.
"The boy really needed one-to-one attention from a foster carer and obviously we were unable to provide that. Needless to say, the arrangement broke down and he had to move on to another foster carer. We are amazed at the mis-matching of foster carers and children who need foster care – it is disastrous for the children and disastrous for foster families.
"We appreciate this happens probably out of sheer desperation to find foster care places. The problem is that this is only a short-term solution and the damaging impact later on from making the wrong decision can have devastating effects all round.
"When a placement breaks down you can get children running away, young people making themselves so difficult and disruptive that the situation becomes impossible or even making allegations or being aggressive. We have experienced all of this.
"When the foster agency rings, you know the local authority has already failed to find a place for that child; that's why they have passed it on to an agency, so it's already a very urgent situation. There is a lot of pressure on foster carers to accept children wherever possible because you know that otherwise they will have nowhere to go.
"There is no doubt that in the wake of the Baby P case and other cases like it, social services departments are taking more children into care. My view is that social services have to intervene early to support parents rather than picking up the pieces later on."
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