COUNCILS in Wales have responded well to the "significant" funding pressures of recent years - but they must improve to meet budgetary challenges ahead, warns a financial watchdog.

Wales' 22 councils have saved hundreds of millions of pounds in response to tough budget settlements in the years since economic downturn and recession.

Most recently, core funding fell by £175m in 2014/15, and a further £65m cut in that funding has been made for the new 2015/16 financial year.

The Gwent area's five councils - Newport, Torfaen, Blaenau Gwent, Monmouthshire and Caerphilly - have had to bear their share of these cuts, this year ranging between 2.5 per cent and 4.3 per cent.

The Wales Audit Office has examined at the financial resilience of Welsh councils, and concluded they have been "active" in responding to a tough financial climate.

But Auditor General for Wales Huw Vaughan Thomas says that with more budget challenges ahead, they must improve their financial management and planning.

His report concludes that although most councils are setting clear corporate objectives, they need to ensure medium term financial plans and service plans are sufficiently joined up to deliver their priorities.

In most key areas reviewed, the report finds that without improvements, planning arrangements that were once good enough, are unlikely to withstand the growing financial pressures councils will face.

Overall levels of reserves held by councils has continued to increase which, says the report, suggests councils are managing to deliver surpluses despite the financial challenges.

While such surpluses give councils a chance to build a financial buffer, and invest in transforming services, the report highlights concerns that without a clear strategy for their use, councils will be criticised for hoarding funds with no clear purpose.

The report makes nine recommendations, including:

• Councils ensure corporate plans maintain a three-five year forward view and are in line with medium term financial plan and support strategies;

• These medium term financial plans should identify major financial risks, and be subject to effective scrutiny by senior officers and councillors before being adopted;

• Councils should review their finance teams, to ensure they have sufficient capacity and capability to meet future demands; and

• Detailed reserve strategies should be developed, outlining the specific purpose of usable reserves.

"Welsh councils are facing a financial tipping point. Although they have made progress in addressing some of the pressures they face, they now need to strengthen their strategic financial planning and management and revise their service delivery structures," said Mr Thomas.

"If they fail to embrace the need for transformational change, their financial management arrangements will not be fit for purpose to meet the growing financial challenges they will face in the future."