Local authority finances in Wales on an “unsustainable path”, report concludes

Local authorities in Wales face a funding gap of £744m by 2027, according to a report from Cardiff University’s Wales Governance Centre.

Use of reserves, higher than 5% Council Tax increases, and further funding from the Welsh Government could mitigate challenges in 2024-25, the analysis concludes. But beyond that, 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 £318 million in cash terms by 2027-28 in all other areas.

Guto Ifan, of the Wales Fiscal Analysis Team said: “While Local Government services have been spared from the cuts announced for this year, the projections outlined in the briefing suggest a difficult medium-term outlook for Welsh local authority budgets. Inflation and pay rises are set to fall over coming years, but spending pressures are still likely to outstrip projected increases in funding. This could have a serious impact on the provision of local services.

“In the context of the deep slashes in spending since 2010, the feasibility of achieving these further cuts to services remains questionable. “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.”

According to the findings, spending pressures have outstripped the growth in local government revenues over the last two years, despite significant increases in funding from the Welsh Government. A key driver has been substantial pay increases for local government staff and teachers, despite many workers still seeing real-terms pay cuts.

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%.

Researchers estimate that by 2027-28, over four-fifths of the increase in local government resource income will derive from increased Council Tax revenues.

Guto Ifan added: “Of course, as has been the case over recent years, the economic and fiscal context could radically change. The recent revisions in UK GDP shows the inherent uncertainty in fiscal plans and forecasts. Following a UK General Election next year, a different government could set an alternative path for public spending. However, 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.”