The Economic and Social Research Institute has said the Government should aim for a more rapid reduction of the Budget deficit, eliminating it entirely by 2014, through more spending cuts and increased taxes.

It also says a European solution is needed to relieve Ireland of much of the costs of the banking crisis.

The ESRI says national income will grow by 0.5% this year, led by exports, with particularly strong export growth now showing in Irish-owned companies.

In a more upbeat view of the economy, the ESRI says Irish-owned firms in the so-called traditional sectors like food and drink are now seeing very strong export growth, as the pickup extends beyond the multinational sector.

Service exports are also forecast to enjoy another year of strong growth.

However, it said the budget deficit should be cut more rapidly, urging the Government to go for a zero deficit by 2014, rather than the 4.7% deficit the Government is planning.

This would give it more credibility in the markets, where the Government must return by then to fund a very large rollover of debt due that year.

It said Ireland should get a cut in the bailout interest rate from the EU without any conditions such as a rise in corporation tax, because Ireland has already contributed to Europe by confining the banking crisis to within the State and limiting damage to other banks.

The ESRI has argued in favour of a European solution to relieve Ireland of much of the burden of recapitalising the banks, thereby reducing the overall debt burden.

The Irish Congress of Trade Unions said the call for higher taxes and more spending cuts is a reversal of the ESRI's view in the autumn.

The Government has said the policies put forward by the ESRI would damage growth.