The Economic and Social Research Institute has said July's EU agreement to reduce interest costs on the EU-IMF bailout funds means Ireland’s debt-to-GDP ratio will be significantly lower than previously estimated, while the Budget deficit could fall below 3% in three years’ time.

Ireland's debt position is also helped by lower than anticipated bank recapitalisation costs.

In its new analysis, the ESRI says the gross-debt-to-GDP ratio should now peak at about 113% of GDP in two years' time.

Before the deal done at the EU summit in July, the Government and the EU-IMF forecasted a peak of between 118% and 121%.

The ESRI also notes that Ireland will have a large cash balance in 2013 and, taking this into account the net debt ratio will peak at 103% of GDP.

This compares with a previous net peak of 111% of GDP back in 1987.

The lower costs of the bailout deal should mean Ireland outperforms its target of getting the budget deficit below 3% of GDP by 2015 - assuming the austerity programme is implemented in full and there is decent growth in the economy.

As Ireland's new debt outlook becomes more widely known, the ESRI says it should increase market confidence in Ireland's ability to ride out the current crisis and improve prospects of returning to borrowing from the markets in two years’ time.

Tánaiste Eamon Gilmore has said the ESRI assessment of the economy shows that progress is being made, but it does not mean tough budgetary measures can be avoided.