The Economic and Social Research Institute has said a neutral budget, neither inflating nor contracting the economy, is the most appropriate policy for Budget 2018.

In its latest quarterly economic commentary, the ESRI says "there is certainly no case for the Government to stimulate economic activity with the budgetary package".

It recognises a need for increased levels of capital spending, particularly for social housing, but says this could lead to the economy overheating, unless carefully managed.

The ESRI also warns that rising house prices and a rapid increase in the pace of mortgage lending means pressures may be rising in parts of the economy.

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Its advice to the Government ahead of next week's Budget is to avoid worsening the existing demand-side price pressures through fiscal measures such as changes to the help-to-buy scheme or any loosening of the Central Bank's macroprudential rules in the mortgage market.

To maintain budget neutrality, it advises that any reductions in tax should be offset by increases in taxation elsewhere.

The ESRI has raised its forecasts for growth for this year to 5% and to 4% for next year.

With employment increasing and consumer spending continuing its strong growth, the ESRI's latest quarterly economic commentary says framing a budget policy is becoming more challenging.

The high level of growth suggests fiscal policy should remain neutral. But after the financial crisis, there is a clear need for greater investment in areas such as public housing, the water network and primary day care centres.

Add in the difficulties involved in measuring the "true" rate of economic growth, and the Government faces what the ESRI calls a "delicate balancing act of simultaneously ensuring the economy does not overheat while ensuring sufficient levels of investment occur over the medium term".

By the end of next year the ESRI says unemployment should have fallen to about 5% - a figure traditionally accepted as "full employment" - beyond which wage inflation pressures increase.

Public capital spending plans outlined by the Government foresee a big increase in capital spending over the next four years, increasing to €7.8 billion by 2021.

According to ESRI economic modelling, this level of spending increase will increase GDP growth by around one percentage point per year more than the baseline estimate.

It will also reduce unemployment even further, and will probably increase the deficit, unless offset by other measures, such as tax rises.

Report author Professor Kieran McQuinn said: "With respect to the forthcoming budget, the key challenge for the Government is how to transition the economy from one enjoying elevated rates of economic growth into a more stable period of sustainable activity over the medium-term."