The New Local Government Network has warned that councils may undergo a radical but shrinking process of 'Californication' in response to the pressure of budget cuts.

In a headline catching forecast of the organisation and running of councils by 2020, the think-tank's latest report entitled 'Future Councils: life after the spending cuts', sets out possible scenarios for the kind of world local government will be working in.

It suggests that lack of funding and new rights for citizens over planning and service delivery could leave councils in a similar position to the Californian state government - struggling to provide services in the face of high demands, low income and increased direct democracy but playing a less important role in people's lives.

Another possible scenario envisages local authorities in areas such as the North East or Greater Manchester clustering together into new regional federations that manage economic growth and share services – with some having 'metro mayors' with powers comparable to the London Mayor Boris Johnson.

Councils introducing 'pay as you go' public services for residents and selling their services to neighbouring boroughs, allowing them to cut council tax and perhaps even pay dividends to poorer residents is another possible option suggests the NLGN, which also foresees that handful of local authorities may commission most of their services and become 'residual councils' – commissioning hubs that directly deliver almost no public services.

Simon Parker author of the report and director of NLGN, said: 'Local authorities are quietly preparing to transform the way they work in response to budget cuts. Some services will change radically as councils become commissioning hubs. Expect councils to redesign everything from social care to street cleaning, more delivery by the private and voluntary sectors, and an increased reliance on personal budgets.

'This is a time of risk and possibility for local government. Town halls could find themselves becoming less relevant as direct democracy and consumer-led services start to bypass local democracy.

'The key for councils who want to remain at the heart of their communities is not just good service delivery, but strong political leadership to drive economic and social growth for their residents.'

In a foreword to the report, Northumberland county council chief executive Steve Stewart said:

'The scenario-based approach taken here is essential. It's not just the preserve of think tanks and academics. It's essential for practitioners, especially over the next few years if we are to sustain any kind of economic and social resilience in our places. None of these scenarios might actually materialise, but is likely that elements of all of them could.'