Irish Water must compete with schools, hospitals and roads for capital funding after the company failed to pass a crucial EU test.
In a reversal of earlier statements, the Government has admitted that unless Irish Water can borrow off the national balance sheet, spending on water and sewerage services may suffer.
The admission was seized upon by the Opposition as evidence that the Government had "meddled too much to allow it be a stand-alone".
The Public Expenditure Department last night said in a statement that while the Eurostat decision had no impact on the next Budget, it could impact over time.
This is because Irish Water's borrowings, which currently stand at €1.3bn, will be classed as national debt. EU spending rules require governments keep the deficit to a minimum.
"In the Spring Economic Statement, the Government made the operating assumption that pending the Eurostat decision on the classification of Irish Water, the figures associated with Irish Water would be included within the general government sector.
"In the longer term, if unchanged, the Eurostat decision will mean capital expenditure on water will have to compete with other investment requirements," it added.
Fianna Fail's environment spokesman, Barry Cowen, said the Government had contradicted itself several times on the issue.
"It is clear that they depended on this flawed application to Eurostat and had no 'plan B'. The statement from Mr Howlin's own department contradicts comments by the Minister for Finance on the issue," Mr Cowen said.
Irish Water proposes spending €5.5bn between now and 2021 upgrading the network to meet EU safety and quality standards.
The minimum yearly investment required stands at some €600m.
But the Government also faces a backlog of essential capital works on existing infrastructure, with roads and the public transport system requiring a minimum investment of €300m-a-year just to maintain the network as is.
With a return to economic growth, and a forecast population increase of 170,000 by 2018, there is also considerable demand for new schools, healthcare facilities and housing.