Council draws up savings as report confirms £5.5m shortfall

A Valleys council is currently facing a budget gap of more than £5m for next year.

Merthyr Tydfil Council’s current hole in its finances for 2026/2027 is worth £5.53m, a council report has said.

The budget update report going before cabinet and full council on Wednesday, November 12, includes additional costs of £13.5 million such as pay pressures, additional service demands and capital financing costs.

But these are offset by net funding increases of £7.52 million including Welsh Government funding and council tax.

The £5.53m budget gap is a £3.47 million reduction compared with earlier forecasts.

The figures are modelled on assumptions that include a revenue settlement of +2.3% for 2026/27 and 1% in following years, a pay award of +2.5% for 2026/27 and 2% in following years, a council tax increase of 5% per year and no use of reserves.

Changes made to the budget gap since the medium term financial plan in April, 2025, include pay calculations being updated to reflect the most recent information and recently agreed pay awards for 2025/26 and national insurance funding sums that will be received in 2025/26 which have now been confirmed and it is presumed that the same level will transfer into the revenue support grant for 2026/27.

On the teachers pay award 2025/26, funding in relation to the 4% pay award has now been confirmed and it is assumed that the full year effect will transfer into the revenue support grant for 2026/27.

Price inflation has been updated where appropriate, including to reflect most recent indicative utilities pricing.

There are updated demand projections for 2026/27, particularly in relation to social care and capital financing costs which are based on the current debt portfolio and future borrowing requirements.

The report says every effort will be made to continue to identify efficiency savings and this will include maximising income generation opportunities and grant maximisation.

But it says that given that the level of savings required is £5.53 million for 2026/27 alone, it will be necessary to go beyond the traditional approach to identifying operational efficiencies.

Operational efficiencies

“Whilst every effort will be made to deliver the majority of savings requirements through operational efficiencies and the council’s transformation programme, the quantum of savings is such that options which impact on services (service change proposals) are still likely to be required.

“Directorates are currently drawing up options for review, and these will be consulted upon during coming months.”

As well as outlining proposals to reduce existing budgets through budget saving proposals, departments will also be considering how to reduce the £5.531 million budget gap through cost avoidance measures.

On efficiency proposals, the report says that if no policy decision is required savings will be implemented as early as possible to maximise the chance of securing full year savings in 2026/27.

At the moment, schools pressures included within the £5.53 million budget gap for 2026/27 total £1.93million which is an increase of 3.6% on current delegated school budgets so it exceeds the overall 2.3% increase in funding that the council is anticipating it will receive from Welsh Government.

Affordability

The report says that the affordability of this will need to be kept under review as part of the wider range of “difficult options” to be considered when balancing the budget for 2026/27.

The report adds that there are many uncertainties including the teachers’ and NJC pay award that will all need to be kept under review as the year progresses.

On pupil number movements, there is a net decrease projected across all mainstream schools both in 2026/27 and over the medium term but the position is mixed across sectors with a reduction in primary and secondary pupil numbers expected to continue compared with an increase in special sector pupils.

Over the last number of financial years, there has been a cumulative reduction in school balances and the aggregate balance at the end of March, 2025, was £861,000.

Review

The school governor-approved 2024/25 budgets, set in May, 2024, anticipated a cumulative deficit balance of £486,000 at the end of March, 2025, so the final position was better than initially forecast.

Schools have finalised their governing body approved budgets for 2025/26 and these reflect a projected cumulative deficit of £1.54 million by March 31, 2026, and the report said the position would need to be kept under review.

“With both the number of schools in deficit and the average deficit balance projected to increase, there are clear challenges in returning to a balanced position in the medium term.

“This will require a continued need for schools and education to work closely together to ensure that financial resilience is recovered through halting and then reducing both the size and the number of schools in deficit over the next three years.”