Analysis: Decade of growth has clouded judgment about future economic risks, writes Una McCaffrey.

The perceived risks to the Irish economy are fairly well-documented: a high dependence on the building industry and the development of what the ESRI in its latest medium-term review calls a "euphoria" in the household sector.

This latter factor is characterised, according to the institute, by an "apparent insouciance about the future". In other words, borrowers like you and me find it hard to believe that the economy could stutter in coming years and that we could run into trouble with servicing our loans.

Professor John FitzGerald of the ESRI yesterday described this as a "feeling of invincibility" based on a decade of growth. And of course the key to all of this is the property market.

This is because it has brought higher wage rates for construction workers, which have in turn led to rising house prices and higher wages elsewhere. Even by the barest measure, housing construction accounts for 14 per cent of economic growth. This means that problems in the property market will naturally bring serious problems elsewhere. The ESRI does not believe a shock is inevitable but says it becomes more likely as the construction sector continues to grow.

With this in mind, the institute wants some Government action and it wants it now. It says money needs to be taken out of the building sector, no matter how unpopular the required measures might be with the electorate.

Prof FitzGerald shied away from specific policy suggestions yesterday, but he referred to a property tax, a withdrawal of mortgage interest relief and the immediate removal of all property reliefs.

The theoretical merit in such action may be easy to see, but it is harder to envisage a Government so close to election being as brave as the ESRI in its tax ideas.

The institute's observations on corporation tax provide a similar case in point. Prof FitzGerald argues that the Republic needs to become a fully-fledged services economy and, in doing so, reduce an investment reliance on the low corporation tax rate.

Yesterday, he cited US media reports that highlighted the extent of the benefit some US multinationals draw from the Irish tax regime. He pointed out that the situation could become pressing if the US administration starts to make similar disapproving noises. "You don't want to provoke our friends", he said, urging the Government to avoid such nastiness before it emerges. An emphasis on the development of our services sector will aid this effort, he believes.

Still with the US, the ESRI, like so many other commentators, is waiting for the day of reckoning to come for the US balance of payments deficit. This deficit currently stands at about 6 per cent of US economic growth and is rising. Economists are united in advising that its expansion should be checked and corrected, but even the experts cannot predict when this will occur or how long it will take to settle.

The Republic's problems in the event of a sudden adjustment would be huge, in the ESRI's analysis. The dollar would weaken extensively against the euro, the Republic's competitiveness would plunge, foreign direct investment would wither and Irish trade with the rest of the world would decline as an economic malaise spread.

Even if this adjustment is more gradual however, the current Irish growth rate cannot last, according to the ESRI. In predicting the future for the economy, the institute has taken two scenarios: one of "high growth" and one of "low growth". Neither sees growth being maintained at current levels.

One of the main differences between the two scenarios is in the forecast level of immigration. In high-growth, net immigration would rise to 44,000 per year by 2015, whereas in low-growth, it would fall to just 13,000. In the year to April, net immigration was the highest on record at 70,000, but the surge was attributed mostly to last year's expansion of the EU.

"We believe it's unsustainable," said Mr FitzGerald of the 44,000 figure, in part explanation of why "high-growth" after 2015 would not be sustainable either.

The thing to remember of course is that the 3.3 per cent growth the institute expects for the years around 2015 would be considerably more sustainable than the 9 per cent per annum the State saw between 1995 and 2000.