Government formation discussions between Fine Gael and Fianna Fáil broke up last night without resolution on the future of the utility.

Government sources have said that limited extra spending power means plans by both parties to reduce and abandon the USC would have to be forgone to fund the changes being proposed in relation to water charges.

Yesterday, it emerged that among the plans being discussed by the two parties is an increase in the allowance granted to homes before charges kick in, and an expansion in the level of waivers to groups like the elderly, the sick, and the unemployed.

Sources have warned that both measures would impact on the funding model of Irish Water and require an increase to the state subvention to Irish Water, which amounts to €479m for 2016.

Such an increased cost to run the utility would severely impact on plans to cut taxes, it has been warned.

Two leading economists have stated that gaps in the funding for Irish Water or whatever company succeeds it would have to be met from existing funds elsewhere.

Economist from the University of Limerick, Stephen Kinsella, last night said: “It is a straight decision, a like for like swap and I have gotten the feeling since the election that Fine Gael have wanted to drop the USC plan anyway.”

Fellow economist, Colm McCarthy, said: “Clearly if they are collecting less money, there is an exchequer cost to that.”

Fine Gael had committed to abolishing the USC entirely over the next five years, while Fianna Fáil had committed to abolishing it for workers earning up to €80,000 over the same period, which they said would cost €2.64bn.

Talks between the two parties were delayed several hours yesterday over an impasse on the issue of Irish Water.

The stand-off required a meeting of Taoiseach Enda Kenny and Fianna Fáil leader Micheál Martin, but they failed to agree a solution.

It is understood that Fine Gael’s negotiating team continued to push the possibility of household allowances, waivers and other fee-reduction measures as part of any Irish Water deal.

Fine Gael put forward the option as a compromise measure between its position and that of Fianna Fáil.

However, Fianna Fáil rejected the proposal because of concerns the ongoing existence of the utility would make the party vulnerable to claims it sold out on its commitment to scrap Irish Water entirely.

Fianna Fáil separately put forward the prospect of deferring all charges until every house in the country is metered, at which point an accurate measure of how much water individuals are using could be put forward.

This would allow an allowance system to be introduced whereby households would be given a substantial amount of “free” water and would only pay for what excess levels it used.

However, Fine Gael rejected this offer as the complete freezing of charges would effectively be handing victory to Fianna Fáil, which sought the move in its election manifesto.

The meeting lasted less than two hours and the parties will meet again today.

Health Minister Leo Varadkar said he understood the people’s frustrations with the slow pace of the talks.

“The process is slow and we have to refer back to our party leaders,” he said.

“It’s almost two months since the election and I know members of the public as well as politicians are frustrated but I think it’s moving in the right direction.”

Finance Minister Michael Noonan has said that Fine Gael and Fianna Fáil are keen to compromise — but admitted that Irish Water remains a major issue.

“Well, nothing is agreed until everything is agreed, to use the usual formula,” he said.

“But it’s down to about five or six net points, I would think — and Irish Water obviously is one of them.”