The Welsh Government “has not fully reviewed how it allocates funding to councils”, leaving authorities in Wales struggling to plan budgets and balance short and long term demands, the Auditor General for Wales has warned.

The latest in a series of reports on council finances by Auditor General for Wales Adrian Crompton looks at how the Welsh Government funds councils and whether the current system is working for local authorities to produce sustainable budgets year-on-year.

Mr Crompton said that councils “currently face significant financial challenges.”

“Against this backdrop, they must deliver the services their communities rely on and plan for their future needs,” he said.

“Balancing short and long term demands for services is difficult for councils to do.

“This increases the importance of financial planning to help them to meet demand and deliver value for public money.”

The Auditor General said that the “funding councils get from the Welsh Government is the main way that they pay for their services” and “how the Welsh Government makes this available to councils can have a significant impact on councils’ ability to deliver value for money.”

He warns in his report that the Welsh Government “has not fully reviewed how it allocates its funding to make sure it is effective and based on timely information” and that “the Welsh Government’s approach to estimating the costs of implementing new laws does not help councils to plan their budgets.”

In 2024-25, the Welsh Government funded around 69 per cent of councils’ gross revenue spending.

It did this through sharing general and restricted grants, as well as redistributed business rates.

The Welsh Government aims to share funding with councils through the settlement based on how much it costs to deliver council services.

It does this through the Standard Spending Assessment (SSA).

The SSA is commonly referred to as ‘the formula’ but includes smaller formulas that are combined to calculate the total amount of funding per council.

The report said that a “small minority of councils do not believe the information shared by the Welsh Government is always easy to understand” with councils describing it as “being difficult to see why the formula results differed between neighbouring councils or how the Welsh Government had made some adjustments.”

Mr Crompton said that while the Welsh Government “regularly updates most of the data used in allocating the settlement”, it also uses a “significant proportion of much older data.”

72 per cent of the data used for the 2025-26 SSA is from 2023 or later, but the remainder is at least nine years old.

“The Welsh Government has not independently reviewed the settlement formulas as a whole in over 20 years,” the report said.

“The SSA was last independently reviewed before the 2001-02 settlement.

“Since then, councils have received significant new responsibilities, and there have been many wider societal changes in Wales.”

The Welsh Government said it does not consider it needs to fully review the formula, because it “does not believe there is a consensus amongst councils on the need to do so,” the report said.

In an earlier report on council finances, Mr Crompton called for councils to be given firmer budget settlement numbers much earlier than currently happens.

“The Welsh Government’s announcement of the settlement has been later since the Covid-19 pandemic,” the report said.

“Prior to this it usually published the draft settlement in October and then the final version in December.

“Since 2020-21, this has moved to usually being December and February, respectively.

“We reported that councils raised the timing of the announcement as being a barrier to their financial planning in our financial sustainability report.

“A later final settlement gives councils a short time to set their budgets.

“The timing of the settlement can also reduce the time available for councils to ask the public for their views on their final budget proposals.

“This has led some councils to reduce the amount of consultation they undertake.

“This increases the risk of councils taking decisions without reflecting the views of their communities.”

The report says that councils in Wales have also raised concerns about funding to support them to implement new laws passed by the Senedd.

The report heard specific issues about funding for two new responsibilities in particular – funding of the reform of additional learning needs provision, and the removal of profit from children’s social care.

“Councils are concerned that the amount that they are involved changes significantly between different draft laws.

“Some officers believed that councils were not involved at all in some proposals.

“Some also believed that the Welsh Government misses some opportunities to ‘sense check’ its estimated costs and benefits of new laws.

“Welsh Government officials also recognised that councils have had a lack of confidence in the accuracy of estimates due to estimates being wrong previously.

“The Welsh Government has aimed to improve how it involves councils in developing its Regulatory Impact Assessment (RIA)s.”

Closing his report, Auditor General for Wales Adrian Crompton said: “As well as the fees and taxes paid by their communities, councils receive funding from the Welsh Government.

“How that funding is calculated and distributed is critical to the planning and delivery by councils of the services they provide.

“To make the most of that funding, value for money needs to be at the heart of decision making locally and nationally.

“My report finds that the way the Welsh Government funds councils does not always help them to achieve value for money – particularly over the longer term.

“In particular, the Welsh Government does not give councils enough clarity over funding in the future to help them to plan.

“When combined with how late councils may be allocated some funding – especially restricted grants – this increases the risk of councils taking decisions focused on the short-term only.

“I would like to see councils and the Welsh Government planning more actively for different funding scenarios so as to be more agile and responsive when funding decisions are announced.

“The way that most funding is allocated has not been fully and independently reviewed for over 20 years, despite significant changes in our communities, their needs, and demands.

“The Welsh Government needs to satisfy itself, and councils, that its current approach remains fit for purpose and enables the delivery of value for money.

“It also needs to consider whether its use of grants is proportionate and justified.

“Restricted grants are a valuable tool for delivering national priorities.

“However, their number, design, and timing can create inefficiencies and place additional administrative burdens on councils.

“All this matters because it affects how well councils can plan for the future, invest in prevention, and deliver sustainable services.

“It also affects the Welsh Government’s ability to achieve the best possible outcomes from public spending.

“Many of the findings in this report reflect recurring themes I have seen throughout my time as Auditor General.

“Addressing those is essential if the Welsh Government and local authorities are to navigate today’s extreme financial and demand challenges and deliver sustainable public services to the people of Wales.”