The Welsh Government has asked us to produce an analysis of UK and international funding models and approaches as part of its review of the formula used to distribute funding to local authorities in Wales

In Wales, the local government funding formula underpins the distribution of approximately £6.4 billion of Revenue Support Grant and Non-Domestic Rates to the 22 local authorities. The distribution of the local government revenue funding is primarily governed by the Local Government Finance Act 1988 and the Local Government Finance (Wales) Act 2024. This legislation requires Welsh Ministers to calculate and produce an objective, needs-based funding formula allocating the Revenue Support Grant and Non-Domestic Rates to local governments across Wales.

The Welsh Government uses a range of demographic, social and geographical data to determine how this funding is distributed. The formula takes account of factors such as population, deprivation and rurality, and their impact on the cost of delivering local services. The resulting assessment aims to ensure that funding is allocated in line with councils’ relative service demands and the costs they face in providing services.

The Welsh Government has asked WCPP to review funding distribution methodologies used elsewhere in the UK and internationally and to explore alternative principles and allocation approaches. The findings will inform future decisions about the direction of the review of Wales’ local government funding system.

The research conducted by WCPP explores the following key questions:

1. What methodologies are used to allocate funding for local public services across the UK and internationally?

2. What principles underpin these distribution systems, and how do they differ from those currently applied in Wales?

3. What indicators and drivers of relative need, demand and cost are used within different funding systems?

4. What are the advantages, limitations and added value of different approaches, including the extent to which additional analytical complexity, data collection and modelling improve the accuracy and fairness of funding allocations?

5. How do funding systems incorporate rural proofing considerations and account for the additional costs associated with rurality, sparsity,

remoteness and dispersed populations, including the impacts of older demographic groups?

This research will contribute to the Welsh Government's wider technical review of the local government funding formula, which seeks to strengthen the evidence base for future settlements. As part of this work, the Welsh Government is refreshing datasets, reviewing indicators and recalibrating weightings within the existing needs-based framework.