The economy will be running a deficit again within three years if Government spending is not cut back, according to a report from Goodbody Stockbrokers.

If spending continues at the 11 per cent annual average under this Government, the deficit will be a massive £2 billion (#2.54 billion) by 2006, according to Goodbody head of research Mr Colin Hunt.

In contrast, if spending were held back to the 4 per cent promised by Minister for Finance Mr McCreevy when he took office, there would be an even larger surplus of £3 billion by 2006.

This £3-billion surplus figure even assumes some further tax reductions, fully funding the £6 billion National Development Plan, and payments into the pension reserve fund.

However, if spending continues to accelerate - it is currently running at over 20 per cent - the deficit will be even higher and will arrive even earlier, Mr Hunt warned.

"Spending of 11 per cent and even more is simply not fiscally sustainable. It is not compatible with prudence at all, as the last thing the State wants to do is to return to the deficit financing of the 1980s."

He added that it was time for a complete reappraisal of current expenditure. "The idea that more money equals an improved service is naive. We have to ask why we have not seen substantial improvements given the massive amounts of money being spent."

He pointed out that health spending is up 82 per cent since 1996 and yet there is evidence that there has been a disimprovement in overall health services since that time.

According to Mr Hunt, one reason could be that the rate of inflation in the public sector is higher than the rest of the economy. But there is no logical reason this should be so.

"On top of that the public service labour market is still in the 1940s with no flexibility at all. Performance is not rewarded - simply years of service - that needs to be changed if money is to equal improved service.

"We have to realise that throwing good money after bad is not the answer and the Irish Exchequer is not a bottomless pit."

Goodbody has also upgraded its growth forecast for the Irish economy on the back of a stronger than expected trade performance in the first three months of the year.

Mr Hunt now expects Gross National Product to grow by 7.3 per cent this year. "Not bad for an economy which some expected to go bust three years ago." He added that fears that shrinking US demand would lead to a sharp fall in trade growth had not been realised, with exports enjoying a year-on-year increase of 27 per cent in the first quarter of the year.