Councils in Wales face an “unsustainable” funding gap of £744 million by 2027, according to a fresh report from Cardiff University’s Wales Governance Centre, which could mean larger council tax increases, further service cuts and use of cash kept in reserve in a bid to balance the book.

The report, released last week, found while local authorities have mitigated pressures by drawing significantly from reserves – built up during the previous two years – and through council tax increases, the “use of reserves, higher than five per cent council tax increases, and further funding from the Welsh Government could mitigate challenges in 2024-25.”

“Beyond that, local authority finances appear to be on an’ unsustainable path’, with the funding gap growing each year,” the report said.

While latest Senedd budget plans have safeguarded the local authority grant, the report’s findings also estimate that if the Welsh Government plans to increase health, schools and childcare spending go ahead, it will need to find cuts of £318m 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.

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

Mr Ifan added that with no commitment to additional spending, “the Welsh Government and local authorities must weigh up difficult choices that may lie ahead”.