The Economic and Social Research Institute makes the recommendation in its latest report which predicts Ireland will have one of the fastest growing economies in Europe this year.
It has joined a growing number of experts in claiming that the country’s revival in fortunes is hitting stronger and faster than originally thought.
On gross domestic product — which includes the profits of multinationals — the ESRI estimates growth of 4.9% this year and 5.2% next year, higher than it previously predicted.
It also expects unemployment to fall to 9.6% next year and that strong economic growth will continue over the next two years.
It is supporting the Government’s plans for a neutral budget, which it says will bring the deficit to 2.1% of GDP next year.
In its Quarterly Economic Forecast, the think-tank says the country has gone through a “dramatic reduction” in spending in recent years, and therefore “the effect on the economy of a further package of austerity cannot be ignored”.
The report to be published today says: “A neutral policy is warranted to balance the continued requirement for fiscal vigilance with the need to consolidate the growth recovering the economy.”
It notes that there will €500m in additional revenue raised in 2015 — most of which will come from water charges. The “most prudent policy” would be to use this for a stimulus or investment package, it says.
It recommends this is pumped into a social housing investment programme which would help to consolidate economic growth and ease supply and demand issues which are inflating property prices in some parts of Dublin.
The report’s author, Kieran McQuinn, said there are taxation issues which have to be addressed — such as the narrowness of the tax base and the people moving onto the higher rate of tax at quite a low income.
“Those are issues which need to be addressed at some stage. But in terms of where we think that, balancing everything, investment is the best approach,” said the research professor.
Mr McQuinn added that, despite upbeat forecasts, there will be a budget deficit of 2% next year, meaning the country will be spending more than it is taking in.
Because of the high rate of taxes collected from the property sector in the past, Ireland was in the “unique position” of being able to reduce income taxes while increasing spending, he said.
It is “highly unlikely” this will be the case again and therefore harder choices will have to be made to balance taxes and spending.
This means that “greater vigilance” is needed in the future to ensure spending targets are met, particularly in health.
It also says the future of the public sector pension liabilities needs to be “urgently addressed.” Much of the €21bn National Pension Reserve Fund was used to capitalise AIB and Bank of Ireland. “It will be necessary to devote some element of any future surpluses to the issue,” the report says.