The Government has been warned to scale back spending or risk overheating the economy.
In its latest quarterly bulletin, the Economic and Social Research Institute (ESRI) said the Government’s fiscal stance, including the proposed €9.4 billion budget for next year, was adding to demand pressures at the wrong time in the economic cycle.
This could be damaging in the long term “if capacity constraints or cost inflation” prevent the full delivery of the National Development Plan (NDP), it said.
“Ideally the Government should be running a surplus when you adjust for the windfall taxes,” the ESRI’s Alan Barrett said.
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“In order to do that you would be looking at scaling back expenditure or raising taxes something of the order of €8-€10 billion, rather dramatic numbers,” he said.
“The adjustment overnight would have almost an austerity look and feel about it and I don’t think that’s entirely appropriate fiscal policy either,” he said.
“What’s required is a moderation in growth [in spending] over time and a targeting of a [underlying] budget surplus ... but to kind of glide to it over the next three, four or five budgets,” he said.
Mr Barrett said the Government needed to have a “credible” medium-term fiscal strategy.
The ESRI’s warning comes on the back of a similar one last week from the Central Bank, which claimed the additional expenditure being proposed in Budget 2026 was “too large” and “unnecessary”.
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In its latest assessment, the ESRI predicted the economy here would grow by 8 per cent this year in gross domestic product (GDP) terms against a previous projection of 4.6 per cent.
The upgrade for 2025 reflected the “large increase in exports” at the start of the year as firms, particularly in the pharma sector, stockpiled produce in the United States ahead of expected tariffs.
GDP growth is expected to fall back to 2 per cent next year, a downgrade on the previous estimate, as exports moderate in the face of tighter trade conditions.
The ESRI said the European Union-US trade deal, which applies a 15 per cent tariff on most EU exports to the US, had “removed a considerable amount of uncertainty from the economic landscape”.
“While this agreement reduces uncertainty in the short term, the new situation of a 15 per cent tariff represents a deterioration in our trading environment, and will likely be impactful for many firms and sectors,” it said.
In its report, the ESRI noted that while headline inflation had moderated considerably and would contribute to real wage growth, grocery price inflation remained elevated – at 5 per cent – presenting a cost-of-living challenge for many households.
It also questioned the Government’s opposition to the proposed Mercosur trade deal.
The institute said the EU’s trade deal with South America was predicted to increase GDP by 0.13 per cent out to 2035 while having only a minimal impact on beef production.
“At a time when economic policy should be directed towards protecting and enhancing free trade, it seems counterproductive to be opposing free-trade agreements,” it said.
