The ESRI has urged the government to introduce a “neutral” budget next Tuesday
A leading economic think tank has forecast that Ireland will be close to “full” employment by the end of next year.
In a new report, The Economic and Social Research Institute said consumer spending is one of the main reasons for strong economic growth.
However the report called on the government to introduce a “neutral” budget next Tuesday.
While recognising the need for increased spending – particularly in response to the housing crisis it notes that there is a danger of overheating the economy unless spending is carefully managed.
It calls for budget neutrality to be maintained by offsetting any tax cuts with increases in other areas.
The report’s author Professor Kieran McQuinn said increasing spending too much could have serious consequences:
“While there are clearly key infrastructural deficits in the economy that need to be addressed [...] if the government spends a lot of money in terms of capital expenditure, it could increase the chances of the economy overheating,” he said.
The report has forecast growth for 2017 at 5% - with 4% growth predicted for next year.
It expects the “robust expansion of the labour market” to continue – with unemployment expected to average 6.1% in 2017 and 5.4% through 2018.
“Full" employment is often defined as 5% and below.
“We think that for instance by the end of 2018 the unemployment rate will be just above 5%,” said Professor McQuinn.
“Now, 5% is by historical standards in Ireland a very low unemployment rate.
“It is pretty much what we call the natural unemployment rate if you like so we think it will probably be another year before we reach that level.
“But the unemployment rate has fallen very quickly through 2017 so it could even reach that level sooner than we expect next year.”
The report also notes that “upward trends” in investment – particularly in the construction sector – look set to continue into 2018.
Professor McQuinn said the key challenge for the Finance Minister ahead of Tuesday’s budget announcement will be transitioning the economy from one “enjoying elevated rates of economic growth into a more stable period of sustainable activity.”