British taxpayers will have to "pick up the tab" for a £42.8 million funding shortfall at the data watchdog when new rules from Brussels come into force, MPs have warned.
The Information Commissioner's Office (ICO) will see its workload expand dramatically as a result of new EU data protection legislation, the Justice Committee said.
As its responsibilities increase, the changes will also see the ICO's key source of funding scrapped - triggering an "alarming" multi-million pound hole in its finances. In addition, demands on the ICO could increase further if the Government accepts proposals put forward by Lord Justice Leveson in the wake of the phone hacking scandal.
The Data Protection Act 1998 requires every data controller who is processing personal information to pay a fee to register with the ICO, unless they are exempt. But a new EU data protection regulation and directive would abolish this notification fee at the same time as increasing the burden on the Commissioner.
The legislation would see an increase in the number of investigations and a rise in the number of data protection complaints, the Committee said. The Government, with the ICO, has estimated that the increased cost of these new responsibilities will total an extra £28 million per year. The ICO's income from data protection work was £15.5 million in 2011-12, the Committee added, but this will be removed if the notification fee is taken away.
Committee chair Sir Alan Beith MP said: "Taxpayers will have to pick up the tab for the Information Commissioner's vital data protection work when new EU rules come into force - unless the Government can find a way of retaining a fee-based self-financing system."
The report reiterates the Committee's recommendation that the penalties for data protection offences must be increased to include prison sentences. The case of construction companies using an illegal blacklist, which prevented individuals from obtaining work because of their trade union links, illustrates the need for greater sanctions, the Committee said.
Sir Alan added: "We do not understand why the Government has not adopted the recommendation made by us and other parliamentary committees that custodial sentences should be made available for breaches of section 55 of the Data Protection Act."
The Government is in talks with Brussels to secure more flexible legislation that does not hit ICO with disproportionate burdens, and negotiations will run until next year.
Justice Minister Lord McNally said: "The Government is also concerned by the potential financial impact on the ICO of abolishing the notification fee, and so are arguing in Brussels for legislation that does not impose disproportionate burdens."