The budget deficit is on course to fall below 3pc next year, even if Irish Water is kept on the national balance sheet, the ESRI has claimed.
If the cost of running the utility is classed as government spending, it will push the deficit from 2.4pc to 2.8pc, ESRI economists said. But that would still be inside the 3pc deficit target that is at the heart of the entire budget strategy.
The Fine Gael-Labour coalition was stung last month when EU Commission officials raised concerns that a U-turn on water charges could hurt efforts to meet the crucial spending target.
That fear was based on the risk that the case for having Irish Water treated as a semi-state company at EU level could be undermined by reducing the share of its income that comes from ordinary customers rather than the Exchequer.
In a move said to have antagonised senior ministers, sources close to the commission questioned whether changes to water charges could put key budget targets at risk.