The European Commission says Ireland should not scrap the Universal Social Charge (USC).

The recommendation comes in a report which raises several fears on the state of the economy.

The report was given to TDs on Wednesday night.

It says the budget policies of Government run the risk of overheating the economy.

Our political correspondent Gavan Reilly has seen the document.

"Usually the commission always wants countries that have economies which are neither too hot nor too cold - and that's basically what it's getting at here.

"It says the Irish economy is almost at capacity already, and if we continue the budget policies we've already used it could fan the flames a bit too much.

"So the answer would be not to spend all the money available in the budget - which seems unlikely, you'd have to say, given the needs of the new Taoiseach".

The latest  warning comes just days after the executive board of the International Monetary Fund (IMF) said the Irish housing market "requires close monitoring".

It said the economy is facing "substantial, mainly externally-driven downside risks".