The European Commission has said increasing capital investment and at the same time keeping public finances on a sound footing will be a challenge.

In its latest post-programme surveillance report, published today, the Commission’s monitoring team notes warnings from several agencies that the Irish economy could face overheating problems unless the large scale investment that is needed to improve public infrastructure in housing, transport and communications is carefully managed. 

This could include "countercyclical measures" to offset any adverse effects – generally understood to mean an increase in taxation to damp down any uncontrolled growth or bubbles in the economy.

However, it also said "Ireland’s bright economic outlook should allow for sufficient space both to pursue prudent fiscal policy, as well as to address infrastructure deficits".

It noted that modified domestic demand (a measure of economic growth that filters out much of the effects of the multinational sector on the economy) grew at a "robust" rate of 4.7% in 2016 and 4.7% in the first three quarters of last year. 

It is expected to grow at an average rate of 4% over the next two years.

Current spending by the Government increased last year by 4% and capital spending went up by 9.3%.

It said that the Government’s ability to manage its debts "remains comfortable", although it noted that a large "amortisation hump" of bonds and UK bilateral loans are due for repayment over 2019 and 2020 – amounting to some €35 billion. 

At the end of 2017, the NTMA had a cash pile of €10.5bn.

It borrowed €15.75bn last year (more than its €9-13bn target, due to good market conditions), and it plans to issue €14-18bn in bonds in 2018. 

The interest bill on the states borrowing fell as a share of GDP – mainly due to the rapid rise in GDP in 2015 – from a peak of 4.3% to 2% for last year, and is set to fall to 1.8% this year. 

However, when expressed as a percentage of GNI* (the modified measure of national income devised in response to the "Leprechaun Economics" impact of multinational companies on the Irish economy), the interest bill was over 3% in 2016 (compared with 2.2% of GDP).

Overall, the Commission said Ireland’s debt sustainability has improved, and Ireland is "associated with creditor confidence".

It said public debt as a share of GDP is set to fall by just over 20 percentage points to 49%, well below the EU treaty limit of 60% of GDP. 

However it warned that an adverse shock to real GDP growth would eliminate almost all of these gains over the timeframe. 

It said the long maturity profile and structure of Irish debt should see a continuing low interest rate risk for Irish bonds, while gross financing needs are "expected to be limited", as the Government’s deficit is set to be virtually eliminated this year.

The report concludes that the Government has taken measures to address public debt, non-performing loans in the banking sector and housing supply shortages. 

It said the Government "has intervened repeatedly in the residential property market to support the recovery of supply, but it wil take time for the measures to generate effects".