Ask for their ideas. Convey your belief that they will come up with solutions. Don't give advice or answers unless you are asked. You have described a common symptom, but it is only one of many that occur when employees are afraid to report bad news. Mediocrity sets in when people are afraid they will be criticized.
People become discouraged and leave.
You lose credibility. Even if the culture of your company has created this problem, it is now yours to solve within your group. The director of my company, to whom I report, has been on a leave of absence since June. In his absence, I am the senior manager. We spent months preparing, as we are a small organization.