In its latest quarterly outlook, the think-tank paints a rosy outlook in which growth rates are rising strongly over the next few years, boosted by both exports to the US and UK and driven also by a rapid recovery in demand and consumer spending at home.
It forecasts the economy in terms of GDP will expand this year by as much 4.4% and next year by 3.7%. Those projections place the ESRI among the most optimistic of leading forecasters in Ireland and outside the country.
They compare with the GDP growth rates of 4% and 3.8% for this year and 2016 projected as recently as April by the Department of Finance.
However, David Duffy and Kieran McQuinn of the ESRI said the Government runs the risk of failing to learn from the mistakes of the past if it were tempted to run expansionary budgets over time because the bounty in tax receipts of the recovery is so strong.
The ESRI says that for the first time in years the country has control over what to do best for the underlying economy of small businesses and jobs, at a time when “most domestic indicators, including taxation receipts, indicate that the recovery in economic performance is still very evident”.
There is a danger the Government will take measures in the budget that will boost spending in areas that are growing, Mr Duffy told reporters.
Mr McQuinn said it would be “a pity” if running appropriate budgets to suit the conditions of the economy were not put at the centre of policy-making.
Areas such as health spending where budgets had been over-run in recent years need to be scrutinised for the value of money that the services produce, he said.
The ESRI would prefer if increases in the public-sector wage bill went to increasing the numbers employed in the sector, rather than on pay hikes. Investments by Government in housing construction would also be a good way of “breaking the logjam” in housing supply, it said.
The Irish Fiscal Advisory Council last week said Government plans to spend between €1.2bn and €1.5bn in October’s budget would likely break EU budget rules. IFAC said a budget giveaway package of about €700m may just be acceptable under EU strictures.
The ESRI yesterday forecast that its preferred measurement of the economy — GNP —will grow 4.2% this year and by 3.6% in 2016. But it also warned that the Irish economy may, along with Spain, be enjoying short-term bouts of very strong growth.
“One possible reason why the Irish and Spanish performance is so impressive is that these economies, along with those of Portugal and Greece, suffered most due to the financial crisis of 2007/2008.
“Therefore, in many respects the present growth rates may represent those countries ‘catching up’ with their long-run steady state path.”