The Government's new water charges plan puts the country at risk of missing the Troika's budget target next year and plunging the country into another round of cuts and tax hikes, EU officials warn.

The Troika has also been surprised at the scale of the public backlash over Irish Water, which they believed was a done deal when they left a year ago.

"The political landscape is now more challenging for the Government on all reform fronts," sources close to the European Commission said.

The next challenge for the Government is to ensure the new water charges plan passes EU spending rules.

The Government says it is confident the cost of Irish Water will be kept off the balance sheet by passing the test.

However, ministers do admit there is a "risk" the water charges plan will fail.

EU officials fear not passing the test would result in spending on Irish Water counting as Government expenditure.

Under the EU financial rules, more than half of Irish Water's revenue must come from charges for it to be regarded as independent.

Sources close to the European Commission last night raised the prospect that if Irish Water is kept on the State's balance sheet, next year's vital deficit target would be missed.

Failing to hit the agreed target to get the deficit below 3pc of the size of the budget would result in more austerity to get the national finances back on track.

"If it were to be classified as part of the Government sector, this would have repercussions," a source close to the Commission said. The Coalition's changes to the water charges plan - to bring down the cost for householders - has altered the mix of funding for Irish Water.

As a result, the new plan throws into doubt the ability to pass the EU financial test, which will be decided based on how much of the utility's funds come from the State or businesses and households.

Officials from the European Commission and the IMF are in Dublin this week as part of a post-bailout review.

The EU concerns centre on whether the new plan for Irish Water will mean spending by the agency is classified as part of government sector expenditure next year, rather than as spending by an independent public utility. The difference is academic, but could have huge repercussions.

Eurostat, the official agency that assesses and classifies spending linked to all European governments, is understood to already be in contact with authorities here about the water charges plan.

Eurostat's decision on the so-called market corporation test won't be taken until March next year.

If Irish Water is classified as simply part of the Government, any money it borrows to improve infrastructure would also count towards the national debt.

If the situation does push the State's finances off course it is not clear whether the Troika would demand specific action to go back to Plan A for Irish Water, or simply demand new savings without specific recommendations.

The Troika team is also concerned about the slow progress in liberalising the legal profession - specifically by allowing solicitors and barristers to work together - and overspending in health.

Irish Water managing director John Tierney also said the market corporation test is key.

"In terms of the figures provided, there will be €21m less in charges from domestic customers to be made up by government subvention. In effect, we have the same net amount of money to spend on the system which had been decided by the regulator and that hasn't been affected by the Government's decision," he said.

Taoiseach Enda Kenny has categorically ruled out any further reductions in water charges, even if widespread protests continue.

He stressed the Government has been "fair" and believes enough has been done to allay the "anxieties" of protesters.

He expects people will now "move on" following the new pricing scheme.

"The anxieties and concerns for people have been addressed fully," he said.

Irish Independent