Irish Water has been provisionally classified as being on the Government balance sheet by the Central Statistics Office, pending a decision by Eurostat, the EU statistics agency.

Government sources said that they remained confident that Eurostat would rule that Irish Water was off balance sheet, which was a key goal in establishing the organisation in the first place.

An information note posted on the CSO website said that Irish Water had been classified as part of the Government sector in March, as a Eurostat decision had not yet been made. Classifications are made twice a year and the CSO said it would be updated in October.

Government sources insisted last night that this move by the CSO was a technicality and that they still expect a decision in the next six to eight weeks and are confident it will go in their favour.

It appears likely the CSO has indicated to Eurostat its support for Irish Water to remain off balance sheet.

If the ruling goes against the Government, some €600 million or more will be added to the deficit this year.

The latest exchequer returns suggest that there would be likely to be enough leeway in the 2015 figures to absorb this without having to introduce new tax hikes or spending cuts. However a decision that all Irish Water’s investment should remain on balance sheet in the years ahead would restrict the room for manoeuvre in future budgets, as well as delivering a damaging political blow to the Government.

To qualify as being off balance sheet, Eurostat has to agree that more than half of Irish Water’s revenue is commercial. A key issue here will be how it counts the €100 being returned to households through the welfare system, which the Government insists is separate from Irish Water.

Investment being funded by the State in Ireland’s water network would also come back onto the State balance sheet, if the rules for Irish Water getting the bulk of its funding from elsewhere were not met.

The CSO said in its note that it had agreed last year with Eurostat that if a decision has not been made by March, Irish Water would be provisionally classified as on the state balance sheet until Eurostat made up its mind.

The delay in making a decision suggests that Eurostat is closely examining the issue, though Government sources remain confident that they have a strong case. However, Ministers had insisted Eurostat would make a decision by the end of the spring and further delays are likely to prolong political controversy.

Any lengthy delay in the decision could mean the Government having to take Irish Water spending in to Government spending for 2015, pushing up the deficit.

While this might be manageable, the company’s long term investment programme has been planned on the basis that it will be off balance sheet. If this is not the case , having to count all this as State spending will restrict Government’s ability to spend elsewhere, as new EU budget rules set limits on overall spending totals .

The so-called market corporation test is undertaken by Eurostat each year.