The people running an arm of the British state confessed last week that they can no longer do their job. That is not how the collapse of Northamptonshire county council has been presented, but it is what’s happened. From now on it will provide only the legal minimum of services. From children in care to waste recycling, all are in line for “radical reductions”. Normal service will not be resumed for years, if ever.

Nor is Northants alone. East Sussex says it will follow suit. Soon will come a third. Then a fourth. Make no mistake, this is a hinge point in British politics.

The obituaries for local government are already being written, and come in two flavours. For ministers, the calamity is local bungling; critics snort that town halls have been pulverised by the cuts imposed by David Cameron and Theresa May. Neither argument is wholly inaccurate, yet both miss the truth. What is happening in Corby and other well-to-do authorities is the collapse of an entire ideology.

Call it pulverism, the idea that councils should use financial crises not merely to make savings but to smash up and reshape the public sector. Tried out here and there for decades, in the past few years pulverism has gone nationwide. Aiding and abetting and cheering it on have been the biggest beasts in Conservatism. Under this regime, financial mismanagement isn’t opposed to austerity – but feeds upon it, as local officials hand over taxpayer cash to “project managers” on eye-watering day rates and any passing huckster in pinstripes. It leads to town halls being looted by multinationals for millions, even while adults with learning disabilities are turfed out of their homes to save pennies. If this sounds familiar that’s because what is playing out in local government is an extreme version of the story still unfolding in Whitehall. And one of the best places to see it is on the northern outskirts of the capital.

The London borough of Barnet is the alpha and omega of pulverism. It was a role model for Northamptonshire, and the two are eerily similar. Both true blue Tory; both preaching the need for sound finances while raiding their contingency funds and refusing to raise council taxes; both happy to chuck millions at consultants and build themselves swanky headquarters. And, crucially, both adamant that their council’s future lies in smashing itself up and handing out the shards to big companies to provide the bulk of public services.

Barnet’s plan was to slash direct employees from 3,200 to just 332, while Northamptonshire wanted to outsource 95% of its staff. It was cartoonish, it was reckless, it was grotesque. Most of all, it was meant to serve as an example to the rest of the country of how the right can mobilise austerity for its own brutish ends. Northamptonshire is now a front-page scandal, but Barnet is one to watch. I’ve been writing about it on these pages almost since the start of the great contracting out. Largely unnoticed by the newspapers, this summer the council confessed that it faces a giant financial black hole – precisely the fate that their masterplan was meant to safeguard against. The council will now have to cut services even more drastically. To heap on the humiliation, it must also rip up its outsourcing strategy.

Barnet’s Tories raced down this road even before the 2008 financial crash, eventually unveiling the “easyCouncil” model. Just as Cameron’s big alibi was that wretched note from Labour’s Liam Byrne, saying “there’s no money left”, so Barnet brandished a “graph of doom” showing its budgetary crunch. Bringing in the private sector – in particular the FTSE giant Capita, which snared two vast 10-year contracts worth about £500m – was meant to be the fix. It would ensure better public services for less money.

Wrong on both counts. Under outsourcing, basic bits of local administration are now a bad joke. Barnet’s pensions are in such a state that last year the regulator fined Capita for not filing essential information on time. Roads, also managed by Capita, are so potholed that they became a big issue in the May elections. Recently a Capita employee working for Barnet was jailed for 62 instances of fraud worth a total of £2m. He had violated financial controls for well over a year, yet the council admitted to me that the crimes were spotted neither by it nor by Capita, but by the employee’s own bank.

All of this is costing not less money, but more. Just how much more not even the council’s leaders are clear. The Tories went into the May elections boasting of the borough’s financial stability; the next month they confessed to a black hole of £62m by the middle of next decade. To stave off ruin, the axe will be wielded again.

Both Barnet and Capita claim that outsourcing has delivered “significant financial savings”. That is doubtless true on the core work contracted out – but outsourcing companies always make their money by charging for extras. Resident and blogger John Dix reviews the invoices submitted by Capita under the outsourcing contracts (256 for the last financial year alone) and can tell you what those extras typically include. A parent phoning the library to check if a Harry Potter is in stock? Capita used to charge £8 a call. Training for senior officers? Capita pockets £1,200 for just one session.

Just as I and others warned at the outset, having handed over so much to Capita, councillors have effectively lost control of their own council. Last month the council admitted to “significant issues” with Capita’s new system to manage social care – including the failure to “efficiently bill clients and pay invoices” – making it impossible to keep tabs on costs. Not that Barnet isn’t trying to monitor its outsourcing contracts. It’s created an entire parallel administration to do so, costing £7.8m each year in pay and perks. Jorge Luis Borges wrote a story about a map matching precisely in size and detail the territory it depicted. Today, in the entrails of a suburban bureaucracy, his dream has at last come true.

All this cash could have been spent on something other than ideology. Take the £24m spent on management consultants primarily to draw up the plans for outsourcing, or the running total of £90m that Barnet has since shelled out on agency and temp workers: how many school dinners, carers for older residents or council houses could that have paid for?

Instead, that money has been spent on projects that served as a launchpad for a handful of careers, such as Mike Freer who as Barnet leader came up with the easyCouncil model and is today a Tory whip in the Commons. Or Nick Walkley, the former Barnet chief executive who was responsible for implementing that model and who now heads a Whitehall quango. Plum jobs for them, worsening public services for the residents left behind.

All this is directly linked to another issue stalking Britain: the rise of aggressively racist politics. Under austerity, Cameron and his ministers took migrants’ taxes – then, with devastating cynicism, blamed migrants for putting pressure on the NHS, schools and other services that they themselves were starving of money. To further their own careers they fanned the embers of race hate. In places like Northants and Barnet, residents who have already seen their child’s youth centre shut, their nan lose her care visits or their buses stop running will now see even sharper cuts to their services – purely to keep their councils alive. It will not be the councillors who cop the blame for that, nor the predatory outsourcing firms.

It will be the buggy-pushing mum in a headscarf, the teenager in a wheelchair trying to get on a crowded bus, the Polish guy on minimum wage. They’ll be the handy targets when frustrations rise and tempers blow. Because the point about pulverism is that it is never the originators who get pulverised.

• Aditya Chakrabortty is a Guardian columnist and senior economics commentator

• This article was amended on 20 August 2018. An earlier version suggested that Northamptonshire county council was responsible for bin collection, however that is the responsibility of district or borough councils, not county councils. The reference has been corrected to waste recycling.