The Budget should offset tax cuts and spending increases with additional fees and charges, according to the Economic and Social Research Institute.

In a paper to be presented today at the ESRI's pre-Budget conference, the institute warned that while Budget 2001 will be framed to ensure a downward move in the consumer price index, manipulating the measures of inflation was no substitute for dealing with its underlying cause.

The report added that the Budget should also be directed at steering growth rates in the economy to more sustainable levels.

According to the institute, this would be achieved by applying user fees and charges on publicly provided goods and services, the most likely would include water charges, road charges and car parking fees.

According to one of the report's authors, Mr Danny McCoy, services would be charged for as they are used.

He added, however, that short-term changes - such as the abolition of rates in the 1970s - could have a long-term impact and he warned that the Government needed to be careful not to pursue bad policies in good times. According to the ESRI, the Government should aim for the middle ground between the positions advocated by domestic and foreign policy-makers.

Domestic policy-makers have argued that the economy is shifting up a gear and thus the appropriate policy is to spend on infrastructural projects and give some tax breaks based on the Partnership for Prosperity and Fairness.

Foreign commentators, such as the European Central Bank and the OECD, on the other hand, have argued for some tax rises and spending cuts to avoid overheating within the economy.

But, says the ESRI, the Government should comply with the spending provisions made in the National Development Plan as well as the personal tax pledges in the PPF. But the commitments involved should not be honoured until the later stages of the agreement in order to avoid fuelling inflationary pressures through higher disposable incomes. Noting that the importance of fiscal policy has increased since the adoption of the euro, the ESRI goes one step further - stating that if any indirect tax changes are made they should be offset by widening the tax base.