Welsh local authorities face substantial funding gap next year, new report finds

A new report published by Cardiff University’s Wales Governance Centre shows that on current UK Government spending plans, funding for Welsh local authorities will fall short of the amount required to meet spending pressures over the next Senedd term.

According to the analysis, this funding gap amounts to £178 million in 2022−23, and averages £132 million a year between 2023−24 and 2025−26, posing a substantial challenge for the next government.

But if the Welsh Government decides to redirect budget resources to fund the projected legacy costs of Covid-19 on the NHS – such as the cost of clearing the elective surgery backlog –the outlook for local government could be considerably more austere. In this scenario, local authorities face a potential funding gap of £607 million next year, and an average shortfall of £362 million a year over the following three years.

The report considers the impact of demographic and inflationary pressures, as well the ongoing costs associated with the pandemic. It finds that social services will account for 55% of all local authority spending pressures by 2025−26.

Cian Siôn, a researcher on the Wales Fiscal Analysis project, commented:

“Although more than a £1 billion has been provided to local authorities to aid their response to the pandemic during 2020−21, from next year, government spending is once again set to become more restrained.

“Even though the block grant is set to grow in real terms over the next five years, growing demand for services, including social care, and significant post-pandemic pressures combine to create a challenging outlook for the Welsh and local authority budgets. This challenge kicks in immediately with a substantial funding gap next year, based on current UK Government spending plans.”

As well as projecting future spending pressures, the report analyses trends in local government finance over the past decade.

The report details how, having adjusted for population growth, local authority spending fell by 9.4% between 2009−10 and 2019−20, the equivalent of £220 per person. It also finds that large increases to bills means that Council Tax now accounts for a significantly larger share of the total tax take in Wales (5.4%) than both in England (4.3%) and Scotland (3.8%).

Cian Siôn added:

“Our analysis suggests that above-inflation increases to Council Tax here to stay. In our model, we assume a 4.5% annual increase to Council Tax bills from 2022−23 to 2025−26, and even this is not sufficient to meet funding pressures in full.

“This strengthens the case for revisiting the way the local taxation system operates in Wales. A policy which pivots around inflation-busting Council Tax increases every year is an unsustainable way of funding local authorities in the long-term.”