Welsh local government finances on “unsustainable path” amid potential £744m funding gap: report

Local authorities in Wales could face a funding gap of £744m in two years’ time, according to a report from Cardiff University’s Wales Governance Centre.

The report, which considers the medium-term fiscal outlook for Welsh local government, suggests that the use of reserves, higher than 5% Council Tax increases, and further funding from the Welsh Government could mitigate challenges in 2024-25.

However, after 2025, local authority finances appear to be on an “unsustainable path,” with the funding gap growing each year.

The findings also estimate that if the Welsh Government plans to increase health, schools and childcare spending, it will need to find cuts of £318m in cash terms by 2027-28 in all other areas.

The Welsh Government has spared local government funding from cuts this year, but "tight public spending plans over coming years paint a worrying picture for the medium-term," the report noted.

It is estimated that spending pressures have outstripped the growth in local government revenues over the last two years, with the main drivers being "substantial" pay increases for council staff and teachers, the report said.

Although inflation might slow, spending is still likely to outstrip projected increases in funding, which could lead to service cuts, it added.

Local authorities have mitigated pressures by drawing significantly from their reserves - built up during the previous two years - and through Council Tax increases, which this year average 5.8%.

Despite council tax raises, the report predicts that a funding gap of £354m will open up in 2024-25, and the gap could widen to £744m by 2027-28, according to the report.

Guto Ifan of the Wales Fiscal Analysis Team said: “Any increases in local authority budgets are likely to come from higher levels of Council Tax, which takes proportionately more money from poorer households in Wales.

"This makes the case for Council Tax reform even more urgent and should again encourage policy makers to revisit the question of whether to instead use the more progressive lever of raising revenues, namely devolved income tax increases.”

Guto Ifan added: “[With] the current government and opposition Labour party refusing to commit to additional spending on public services, the Welsh Government and local authorities must now weigh up the difficult choices that may lie ahead.”

Adam Carey