The inspectorate's annual report noted that while the overall effectiveness of children's services provision is continuing to improve, the impact of ongoing financial restrictions risks jeopardising progress.
Ofsted chief inspector Amanda Spielman said that local authority social care budgets have experienced the most significant reductions across the public sector, although statutory safeguarding and child protection services have, to date, largely been locally protected.
However, she said that reductions in funding in other areas, such as preventative and wider children's services, mean that councils are less able to intervene early, before young people need statutory services.
"The evidence suggests that these cuts to youth and other services are a false economy, simply leading to greater pressures elsewhere," she said.
"More recently, local authority leaders have begun to report unsustainable budget pressures in both adult and children's social care.
"The recent experience of Northamptonshire should act as a cautionary tale of how the funding situation in local government, coupled with poor management, can lead to a rapid decline in the quality of children's services."
The Local Government Association has previously warned that children could be left in circumstances of risk unless the government acts to plug an estimated £2bn funding facing children's services by 2020.
- Analysis: Understanding £2bn funding gap
- Baby P death 10 years on: the case's lasting impact on child protection
The report found that despite ongoing financial struggles, current national standards are better now than previously in terms of children's services inspection ratings, with the proportion judged "good" or "outstanding" rising from 36 per cent after each local authority had been inspected under the old single inspection framework, to 42 per cent now.
There has also been a large decrease in the proportion judged "inadequate", from 22 per cent to 13 per cent.
"The improvement in local authority performance should be acknowledged because there often appears to be a public perception that local authorities are failing children," Spielman said.
"This is reinforced through, among other things, the awful events around grooming. Grooming gangs are a potential challenge in all local authority areas.
"However, practice over the past four years has improved exponentially, leading to a wholly different response to vulnerable adolescents. Many of the high-profile prosecutions of these gangs still relate to practice that pre-dates the watershed moment that was the Jay report.
"Overall, the local authority children's services sector is a service demonstrating improvement, albeit not everywhere."
However, Spielman said Ofsted is concerned that during 2017/18 there was a 40 per cent turnover rate of directors of children's services.
"While interim appointments can account for some of this, these changes represent the highest number of annual changes in a generation," she said.
"This is occurring alongside high levels of agency staff in some local authorities and the impact of increased spans of control, particularly those managers at the frontline."