Minister warned on spending pressures and water charges abolition

Senior civil servants have warned Minister for Expenditure and Reform Paschal Donohoe that Ireland would "very likely" face European Commission enforcement proceedings and could be hit with substantial daily fines if the Government abolishes domestic water charges.

The warning comes as officials also forecast that Government finances are likely to come under pressure from a range of sources during the year.

In briefing documents prepared for the Minister, officials warn about the costs - and potential future costs – of ending the water charges. A majority of TDs in the new Dáil favour abolishing the charges.

“The abolition of domestic water charges would be likely to be viewed as the non-implementation of the EU Water Framework Directive and would most likely lead to the EU Commission taking infringement proceedings against Ireland to the Court of First Instance,” the officials warn.

“This could result in due course in substantial daily fines for non-implementation of the directive.”

The Minister is advised that there are several components in the cost to the exchequer of the abolition of domestic water charges.

The initial cost is listed as €210.5 million.

However, the documents also say that the State would have to replace €1.4 billion in Irish Water revenue between 2016-2021. They note that the State would save €110 million from the abolition of the annual water conservation grant, but also say that “sunk costs” of about €420 million in metering would arise “without the anticipated commensurate benefits from leakage reduction and capital investment deferral”.

The documents also highlight the warning: “Obviously, any proposal to abolish or significantly reduce water charges will need to be the subject of considered advice from the Attorney General.”

Some provision for contingent liability arising from the abolition of charges would be necessary, they say.

The officials have identified “critical expenditure pressures” in several areas which will need to be contained if the State is to keep within legally binding EU agreements on budgetary and fiscal management.

They say the critical areas are “public-service pay, public-service pensions, State pensions, HSE expenditure, long- term unemployed, schools expenditure, higher-education financing, social housing, Irish water and water charges, climate change, broadband, justice group expenditure and capital investment generally”.

Of the expenditure pressures, over-budget spending by the Health Service Executive continues to be a source of some alarm in official circles. While the published documents do not reveal the current estimates for the health overspend this year, sources with knowledge of the figures have previously indicated to The Irish Times that they expect the overspending to be on a par with last year's figure of €600 million.

That is despite last year’s supplementary estimate for the HSE – essentially a bailout to meet the bill for overspending – was included in the “base” for this year, automatically increasing the budget for 2016 by the €

600 million.

Senior civil servants and Ministers expect there to be some supplementary estimates this year, despite the previous official position that they are not permissible under European regulations. The document notes that “it can be anticipated that departments will have demands for additional expenditure that would need to be considered by Government during the course of the year”.

The documents acknowledge “the likelihood of a significant unplanned expenditure in health requiring a supplementary estimate by end- year.”

However, the officials warn that significant increases in health staff at the end of last year mean further recruitment this year is unlikely.

“Critically, 2,000 staff were recruited in the last four months of 2015. The 2016 impact of this means that the Department of Health/HSE are proposing measures to manage their budget involving significantly curtailing any further recruitment this year,” the briefing notes state.

Officials say that often the increase in budgets in hospitals “do not deliver a a resulting increase in activity.”

Controlling costs in hospitals will require a “hard edge of managerial accountability that is currently lacking”.

In overall terms, the documents say the previously identified €500 million of "fiscal space" for next year – the amount of money available for the government for new spending and/or tax cuts in the budget – is likely to increase by €200-300 million. However, in the recent talks about a minority government, it is understood Minister for Finance Michael Noonan suggested more than €1 billion would be available by budget day.

There are several warnings in the document about upward pressures on the public sector pay and pensions bill.