Publicly funded social care is caught in a spiral of rising demand from people with more complex needs, increasing costs, tight budgets and falling productivity. Local authorities are tightening their eligibility criteria year on year, and there is growing recognition that the system is not delivering value for money for the taxpayer, or the personalised care solutions that people want.

This recognition has created a political climate favourable to change. In a joint policy statement released in December 2007, five government departments joined the LGA, the Association of Directors of Adult Social Services and the NHS in committing to a more personalised approach to social care. Alan Johnson has pledged £520m to make this a reality. We are on the edge of the most exciting reform in social care for a generation.

The Demos report, Making it Personal, launched in January 2008 argues that the most effective way to deliver on this commitment is to introduce self-directed support, based on personal budgets. The idea of the state giving people personal cash budgets instead of a service isn’t new, of course (we have had direct payments in social care for some time). But personal budgets combine more funding streams and give more freedom than anything that has come before. Over 2,500 elderly and disabled people now have personal budgets, across dozens of local authorities, and the early results are impressive.

The shift is simple but transformative. Currently, if someone is eligible for local authority funding, social workers will carry out an assessment, devise a care plan, and allocate the individual to a set of services paid for and commissioned by the local authority. Personal budgets turn this on its head. Individuals are invited to self-assess with professionals. They are then allocated an approximate budget, which serves as a guideline, and they then design their own set of services that can best meet their needs. Once the plan is approved by the local authority – who confirm that it will keep a person healthy, safe and well – the money flows to the individual and on to the service providers of their choice.

Though it is still early days, initial evidence shows that this approach creates more satisfied users at a lower cost. Our report presents the experiences of 196 personal budget-holders in 17 local authorities: 47 per cent reported improvements in their general health and wellbeing; 77 per cent said their quality of life had improved; 72 per cent felt they had more choice and control over their lives. Most exciting of all, given the exclusion and isolation that disabled and elderly people often suffer, is that 63 per cent took part in and contributed to their communities more, and 55 per cent spent more time with people they cared about.

We found that generating these outcomes costs less too, on average about 10 per cent cheaper. For the most expensive services – such as packages for adults with severe learning and physical disabilities – the savings can be as high as 45 per cent. Even this figure might be dwarfed by longer-term, indirect savings likely to flow to the Health Service, because supporting people to manage their care at home in a way that suits them allows them to plan to avoid long-term and crisis stays in hospital.

This new approach changes how services work in a number of ways. Most importantly, it mobilises people to find better solutions for themselves. While the current system relies on the knowledge of professionals, personal budgets unlock a huge collective intelligence. This encourages innovation, and we found that something like 40 per cent of personal budget users commission things that the state doesn’t provide. By giving someone a budget and support to spend it creatively also makes joining up services around the individual a lot easier.

These are still the early, heady days. There are a number of valid concerns that are often raised. In particular, we found three sets of issues.

The first relate to design. Will people spend the money wisely? Will it be spent fraudulently? Will people take too many risks? We found very little evidence. People on the whole are eager to get the most out of their money to improve their quality of life. It’s important of course that the local authority doesn’t divest itself of all responsibility, and plays a continued – light-touch – role in managing these issues. Good design can ensure that these concerns are answered robustly: West Sussex, for example, has a risk-assessment panel to assess all care packages for risk.

The second set of risks concern scaling up niche reform; many good ideas get trapped on location, driven by inspirational individuals or exceptional circumstances. Two challenges are especially important here: making sure the social care market responds to changing demand, and translating the Better Outcomes People report into measurable indicators that are accepted across government. There is still work to be done to iron out these issues, for example in understanding how commissioners can move away from direct service commissioning towards strategic investment in market shaping. The government’s commitment of £520m to help the transition is an extremely important move in making sure local authorities have the capacity to manage this change.

Finally is the political issue. This reform evokes a strong debate about the issue of equity. Some people fear that well-educated, well-resourced people will do well in the competitive social care market place, while the more vulnerable will get left behind. We did not find that to be the case, and in fact personal budgets are often more equitable than the current system. The way they are calculated tends to result in a closer match between a person’s need and the resources spent on them, which at the moment is often quite chaotic. They also open up access to services for large numbers of people who don’t want a ‘state’ solution. Oldham’s introduction of personal budgets has resulted in a notable increase in the use of services by minority ethnic groups. More importantly, personal budgets close the biggest equity gap in social care, between those who self-fund and have choice over what they get, and those dependent on the state, who have little or none.

Self-directed services through personal budgets started as a grass-roots movement in social care. But it has the potential to be extended into many other areas: maternity care, drugs and alcohol services, mental health, offender resettlement and more. Previous approaches to reforming public services have reorganised and rationalised, and have run their course. Self-directed services transform them.

Jamie Bartlett is a researcher at Demos