Twenty of the 24 schools in Merthyr Tydfil are set to be deemed as either a high or medium-to-high financial risk this financial year. Falling pupil numbers, rising prices and budget cuts have all contributed to the dire financial situation facing schools in the area.
Nearly all of the schools in the area (83%) are to be categorised as either high risk (Red) or medium-to-high risk (Amber) for 2026/27, compared to 18 schools (75%) in 2025/26. A council report states the picture is reflected across Wales.
Scale of the financial challenge
The report states: “The current trajectory of balances helps to illustrate the scale of the financial challenge currently facing schools in setting balanced budgets within the funding levels provided through the 2026/27 budget, given the demographic context of sustained falling pupil numbers.”
It adds: “A similar trajectory in school balances is expected across Wales, with an increasing number of schools facing budget deficit pressures in the current financial period and beyond.”
As part of the annual assessment of schools’ financial sustainability, the council has reviewed schools’ budget positions, year-end balances, medium-term financial plans and wider financial risks. A report to cabinet on Thursday, October 22 says this reflects the continued financial pressures facing schools arising from the cumulative impact of budget reductions applied in previous years, increasing cost pressures and falling pupil numbers.
Funding cuts and planned licensed deficits
As part of the council’s budget setting process for 2026/27, the schools’ formula funding, which grew in line with usual practice to include pay awards, other inflation increases and pupil number changes, had no further cuts applied for 2026/27. This followed a better-than-expected local government settlement, but the cuts applied in 2023/24 and 2024/25 remained embedded within school budgets, resulting in 2026/27 funding levels remaining 6.06% below those that would otherwise have been available.
The report says that following these continued budget pressures, two additional schools have needed a planned licensed deficit (PLD) for 2026/27, bringing the total number of schools operating under a PLD to six, with four continuing from 2025/26. Both schools have submitted plans to recover their deficits over the period of their medium-term financial plans as part of their PLD applications.
While the number of schools categorised as high risk remains unchanged at six, only four schools are now categorised below amber, with three of these being within the yellow (low-to-medium risk) category and one school within the green (low risk) category. The report says the overall movement in categorisations indicates continuing financial pressures and a worsening medium-term outlook, notwithstanding the better-than-expected local government settlement for 2026/27.
Projected deficits and pupil number decline
Based on schools’ approved budgets and medium-term financial plans, aggregate school balances are projected to be in a deficit position of £1.23 million by March 31, 2027. This represents a £1.74 million reduction in balances year on year, with a similar pattern projected over the period of the medium-term financial plan.
The report says 21 of the 24 schools (87.5%) project a deficit position at some point during the period covered by their medium-term plans, with 17 schools projected to be in deficit by 2028/29. It says this position reflects the combined impact of falling pupil rolls, the 6.06% embedded reduction in formula funding and ongoing expenditure pressures, particularly in relation to staffing costs.
The report adds that, given the high proportion of delegated school funding that is driven by pupil numbers, the accuracy of pupil number forecasting is becoming increasingly important in supporting sustainable school budgets. Where actual pupil numbers are lower than estimated, schools may face both retrospective funding adjustments and lower future funding allocations based on reduced pupil numbers. The report says that this can create compounded financial pressure in the year of correction and lower funding levels throughout the remaining period of the medium-term financial plan.
Current school funding arrangements look to balance accuracy and stability by providing funding based on estimated pupil numbers, with retrospective adjustments applied where actual numbers differ from those used for funding purposes. The report says: “Whilst this approach helps ensure that schools receive funding reflective of actual pupil numbers over time, it also increases the importance of realistic forecasting assumptions that support effective medium-term financial planning.”
The report adds that the financial position of schools is being significantly influenced by sustained reductions in pupil numbers, particularly within the primary sector. Actual pupil numbers in the primary sector reduced from 5,129 in 2024/25 to 4,908 in 2025/26, a reduction of 221 pupils, and are projected to reduce further to 4,745 by 2026/27 and 4,383 by 2028/29. This represents a projected reduction of approximately 15% over the five-year period from 2024/25 to 2028/29.
The report says that while not all of these schools require a planned licensed deficit, the projections indicate that a substantial number will need to reduce expenditure, including staffing costs in many cases, to maintain a balanced budget position. Given that over 70% of delegated school funding is pupil-led, declining pupil numbers place additional pressure on school budgets and the affordability of staffing structures.
While funding allocations reduce immediately as pupil numbers fall, schools are often unable to realise equivalent reductions in expenditure in the short term, creating increasing affordability pressures, the report says. Projected funding allocations within schools’ medium-term financial plans reflect anticipated reductions in pupil numbers, but projected expenditure does not necessarily reflect corresponding changes to staffing structures beyond 2026/27 unless a school is operating under a planned licensed deficit or has otherwise identified specific workforce changes. The report says that schools may have opportunities to address financial pressures in the medium term where future staffing reductions or organisational changes are achievable, enabling expenditure to be more closely aligned with declining pupil-led funding.
