Goodbody Stockbrokers have said that no new austerity measures will be required in the next budget for the Government to hit its deficit target of less than 3% of GDP.

In its latest quarterly economic commentary, Goodbody said that the already announced introduction of water charges will bring in some €500m.

This will leave the Government some room to introduce measures to improve medium-term growth capacity, such as an increase in capital spending and a reduction in the income tax burden.

Goodbody chief economist Dermot O'Leary said that "Ireland's cyclical recovery has recently regained momentum, leading to an upgrade to our economic forecasts".

He said that stronger domestic demand trends, a rebound in exports and favourable statistical revisions all contribute to the improved estimates.

Goodbody's preferred indicator - domestic demand - is forecast to grow by 2.9% this year and 3.1% in 2015.

It said that average GDP growth will be above 3% over the next three years - 3.5% this year, 3.6% in 2015 and 3.4% in 2016.

And it expects the Government deficit this year to come in at 3.7% of GDP - well below the budget target of 4.8%. 

This - coupled with extra revenue from the growing economy - would mean the Government would have to do considerably less than €2.1 billion in budget adjustments to bring next year's deficit in below 3%

Goodbody has forecast that the deficit will be 2.5% and 1.5% in 2016.

It said it believed the Government's Budget plans for 2015 should include pushing ahead with water charges to raise €500m.

It also urges continued restraint on public sector pay and pensions, while the Goverment should aim for proposed savings in the Health budget, widen tax bands by €2,000 and reduce the top rate of income tax and USC to 51% (at a cost of €370m).

It said that capital spending remains substantially below pre-crisis levels, and at 2.3% of GDP is below the rate of depreciation of the capital stock. 

This level of spending is, it claimed, at the lowest level relative to GDP since the late 1980s, which it said is potentially damaging for the medium term growth prospects of the Irish economy.