Minister for Finance Michael Noonan has warned that health overspending could eliminate the next government's ability to deliver many tax cuts and policy pledges being discussed during talks on forming a new government.

In an economic briefing to Independent TDs yesterday, Mr Noonan warned that if the health service exceeded its budget by more than €250 million this year, the next government would be “in trouble”.

The Irish Times reported yesterday that a bill for back pay to consultants arising from a legal action against the HSE could amount to as much as €300 million.

In addition, spending pressures could see the health service’s €13 billion budget exceeded by as much as €600 million this year, sources say.

A climbdown on Fine Gael’s commitment to fully abolish the universal social charge was also tabled during yesterday’s talks.

The party says it will now seek the support of the Oireachtas to phase out the levy and will direct a proposed new budgetary committee to examine the proposals.

Fine Gael figures insisted this was not a row-back on its pre-election position and that the party's ambition was to abolish USC in the long term.

Talks between both Fianna Fáil and Fine Gael and the Independent TDs will continue next Monday in advance of the meeting of the Dáil on Wednesday, when a second vote on a new taoiseach is scheduled to be held.

Conclusion

Though progress in the negotiations has been slow, a conclusion of this phase is in sight.

Both Fine Gael and Independent sources say they expect to have an agreed document of policies and priorities for the next government, running to up to 400 pages, agreed by then.

This document could then form the basis for discussions with Fianna Fáil on its support for a Fine Gael-Independent minority government.

Those discussions will decide whether a government can be formed, or whether another election will be triggered.

Mr Noonan told the Independents yesterday that a new election would cost the exchequer some €40 million.

Despite the spiky exchanges in recent days, both Fianna Fáil and Fine Gael are preparing for a negotiating process that will begin next week, and could last for some time.

Irish Water

It is understood that Fianna Fáil leader Micheál Martin will insist that Irish Water is abolished and water charges suspended, as his party pledged during the election campaign.

However, sources in Government Buildings were adamant that acting Taoiseach Enda Kenny would not consider abandoning his policy on water, and many Fine Gael TDs are equally determined not to cave in on the issue.

A bigger barrier to the success of the Fine Gael-Fianna Fáil talks may be the lack of trust between the two parties and their leaders.

Mr Kenny repeated his stance yesterday on Fine Gael's refusal to support a Fianna Fáil minority government.

He said it was Fine Gael’s responsibility to form a government and he was keen to secure as much support from the Independents as possible.

A senior Fianna Fáil source said the comments by Mr Kenny were “arrogant” and an attempt to “undermine” any discussions between the two parties.