The Governor of the Central Bank has warned the Government that too rapid an expansion of house-building could destabilise the economy. 

In a pre-budget letter, Governor Philip Lane said the Government should be prepared to raise taxes to prevent the economy overheating.

After years of hard slog the public finances and wider economy are stable, but the trick now is to keep them that way, according to the Central Bank. 

Central Bank Governor Philip Lane is worried that too rapid an expansion of spending - particularly in house-building - could create the same sort of instability that caused the economic crisis of eight years ago.  

Building more houses will increase economic growth - already among the highest in the Western world - and which could risk overheating the economy. 

Professor Lane said Government may need to increase taxes during a period of high growth, running a large budget surplus, which can then be spent during a downturn.  

Alternatively, slowing down the rate of investment and spreading it over a longer timeframe could achieve similar results, he added.

The Governor also urged caution at using tax breaks to stimulate some sectors of the economy, regardless of their implications for the rest of society.

Speaking on RTÉ News at One, Professor Lane said a balanced budget is reasonable for 2018 but as the budget is now a multi-year process, the Government needs to make choices if the economy keeps growing.

He said that if the Government does not match spending increases with revenue increases that may contribute to overheating pressures in the economy.

The Professor said that if the Government wants the construction sector to expand in order to build public infrastructure and more houses, some other part of the economy may need to slow.

He said while this is not an easy message, it is the reality.

To avoid the boom-bust cycle in the future, when we enter a boom phase we need to strike the right balance between revenue and expenditure, he stated. 

Professor Lane said part of the recipe to solve the housing crisis may be to raise taxes, but in order for the construction sector to grow quickly he said it would also help to get more of the population into the labour market and get people abroad home to work.

Tax options away from personal taxation, such as property taxes and user fees are other instruments the Government can look to for increased revenue, he added.

In today's letter to Finance Minister Paschal Donohoe, Professor Lane said the near and medium-term projections for the Irish economy are for significant expansion.

But he added that risks to growth remain clearly tilted to the downside at both European and domestic levels. 

High levels of public and private debt also make the Irish economy vulnerable to future interest rate rises and upside shocks from overheating risks, he said. 

Ireland's public debt stood at 75.4% of GDP at the end of 2016. The Government has forecasts that it will fall to 62.6% by 2021.