A few years ago, US economists were arguing whether the "rosy scenario" - a continuation of strong growth and low inflation - would work out for the economy there. The ESRI has once again brought " rosy" to Ireland in its latest medium-term forecast.
In essence, it says that the rapid growth of recent years will slow to a sustainable level, but the economy will still notch up annual growth of 5 per cent or more. The economy is robust and is even likely to respond resiliently if hit by any negative economic shocks. Because of this rosy outlook, Irish living standards are likely to continue rising and by 2005 the standard of living here should be in line with the EU average.
The central forecast is encouraging, presenting a benign picture of an economy gradually slowing from its current gallop. However, there are questions about how politically realistic this scenario is.
The authors repeatedly stress the need for fiscal tightening - a tight Budget position - to buffer the economy, and indeed, the forecast is based on some degree of fiscal tightening over the next two years. But this is not likely to prove popular with politicians - or indeed the unions - in the light of the booming budget surpluses.
The forecasters recognise the pressure on the Government and on wage levels and warn that the economy could be thrown off course if expectations run so far ahead of growth that competitiveness is seriously compromised.
The potential bubble in the housing market comes in for a good deal of examination. And the ESRI says the economy could choke through congestion arising from infrastructure limitations. There are a range of other issues - economic, social, and environmental - that policy should tackle to ensure that the economy can continue to grow strongly, according to the report's authors.
Unsurprisingly, the ESRI has found that the economy is currently "fully wound up" and growing rapidly. The most likely scenario, it says, is that it will gradually unwind, with a reversion to a "more normal" European growth rate after 2010. This will see a growth rate for GNP over the next 5 years of around 5 per cent a year, with Irish income per head rising above the EU average by 2005.
Inflation is forecast to increase to 2.9 per cent a year between 2000 and 2005 as demand continues to remain strong and as the labour market tightens. Over the same period, unemployment is expected to fall to 5.6 per cent, reaching 5.3 per cent in 2005 and 4.7 per cent in 2010 - effectively leaving the Republic in a position of full employment.
The structure of the economy will continue to change. There will be a gradual shift from high-tech manufacturing to market services, especially internationally traded services, over the next 10 years. Export growth, which has been one of the main drivers behind the recent boom, is expected to fall off as competition from Asia and eastern Europe intensifies. The main area this will affect is indigenous sector.
The ESRI is predicting that the growth rate in exports will slow to an annual average rate of 6.2 per cent between 2000 and 2005 and 5.3 per cent a year then to 2010. At the same time, imports will grow to 6 per cent a year on average between 2000 and 2005, before falling to 5.3 per cent a year between 2005 and 2010. However, repatriated profits will increase less rapidly in the future as the high-tech sector and foreign direct investment both slow down.
Importantly, the general Government surplus - the main measure of the excess of revenue over spending - is envisaged to average 3.6 per cent of GNP per annum between 1999 and 2005. In other words, the exchequer position will remain very comfortable.
But to achieve all this, the ESRI stresses the need for a high level of investment, especially in public infrastructure and housing. Otherwise, the foundation for continued growth will not be there. This shows the importance of the soon-to-be-published national development plan, which will outline State- and EU-supported spending over the next five years.
One major difference between the next decade and this one is that increasing output is more likely to go to increasing wages ,as the rate of employment growth falls. The ESRI estimates that real after-tax wages could rise by around 3 per cent a year over the next decade, almost 1 per cent a year faster than in the 1990s. The growth in employment is expected to continue over the next decade, and an additional 430,000 people should be at work by 2010 as compared with 1998.
Strong growth and booming exchequer finances will leave the exchequer in a strong position - there is room for major tax cuts. According to the ESRI, these should wait until the economy slows down, in 2002 or 2003. However this could prove very difficult politically.
Personal taxes are expected to fall by 0.5 per cent a year to 2010 and the average PRSI rate would fall by 0.25 per cent a year. The cost of these concessions could come to u£700 million or u£800 million a year.
In an recommendation that will catch the eye of business, the ESRI says corporation tax is likely to rise post-2003, when the single 12.5 per cent rate will be in place. The ESRI has pencilled in a rate of 17.5 per cent by 2010. This would still be enough to attract foreign corporations but may cause less resentment at EU level, particularly given the drive for harmonisation of capital taxes, the report believes. Given that the Government fought hard for the 12.5 per cent rate, it will not welcome this recommendation.
The ESRI has assumed that welfare rates will be indexed to average earnings so groups such as the elderly do not get left far behind as living standards rise. It also points out that groups which are at particular risk include lone parents and their children, and those in low-paid employment. Combating this will also mean tackling the shortage of social housing.
It will be necessary not just to act on childcare but for more flexible working practices to be introduced. As the report points out, this is not specifically a labour market issue. It is, rather, an issue about the quality of life.
As the authors themselves admit, it is almost impossible to predict exactly what will happen in an economy and the end result is as likely to be worse or better than predicted. What is certain is that it will be a more bumpy ride than the gradual growth slowdown predicted.
To this end, it looked at the potential impact of a series of unpleasant surprises. This analysis suggests that the negative effects of external shocks could be magnified in the short-term by three domestic factors: the potential bubble in house prices, excessive wage inflation, and a failure to implement the necessary investment in physical infrastructure.
A dramatic fall in house prices could be precipitated by a sudden shock to the US economy from collapsing equity prices, or to the EU economy from a rise in interest rates. There are fears that households are borrowing too heavily and that this debt is reaching an unsustainable level. This makes the private sector more vulnerable than before to interest rate increases.
The report also warns that because the rapid rise in house prices in recent years has persuaded many potential buyers that house price inflation is here to stay, there has been a rush to invest in housing - possibly at an earlier stage in life than would otherwise have been the case - to avoid being left out of the market. This pattern of behaviour is not confined to "investors". In fact, most potential owner-occupiers express the fear that if they don't buy now they will never be able to do so, the report warns.
This is extremely unstable. For example, if an external shock were to lead to a temporary fall in employment, this would see a significant fall in demand for housing as those who lose their jobs seek employment elsewhere, possibly outside of Ireland. Such a downturn, if significantly large, would see house prices stabilising or even falling slightly. Instead of buying as soon as possible, potential owner-occupiers could then believe that better value could be had through waiting, leading to a further fall in demand. This could rapidly fuel a further drop in price. The cumulative effect of such a change could see the housing price bubble burst, with prices falling by a large amount.
Both shocks would see GNP reduced by 3 per cent or more for a limited period, giving rise to a temporary recession. The biggest potential shock, according to the ESRI, would be an external shock along the lines of the oil crises of the 1970s, or a sustained excessive rise in labour costs, combined with escalating public sector pay problems and a continuing failure to deal with the existing infrastructure deficits.
However, just as likely - indeed more likely, given the slightly pessimistic medium term forecasts of the past few years - is that the economy could grow even more rapidly through higher immigration or through higher productivity growth.
This would make it even more important that substantial resources are devoted immediately to improving the state's infrastructure. This means the implementation of the ESRI report on National Investment Priorities in the National Development Plan as well as major changes in the planning and implementation process. The report warns that now is the time to deal with Dublin's public transport crisis. A delay could mean that the development of Dublin and other major cities is set in stone and will prove almost impossible to change.
The report talks about an "urgent need" to improve the efficiency of many sectors of the economy, especially public utilities. It is critical of the recent Telecom Eireann privatisation, stating that it was too costly and did not maximise the price to the Exchequer. Where State-owned firms operate in competitive markets they should be sold for the highest price attainable.
Immigration is another area where major changes are needed. Already the number of foreign immigrants exceeds the number with Irish ties. The bulk of these are highly educated and make a significant contribution to the economy. But as the economy continues to boom this will be one of the more attractive labour markets in the world. Just as Irish people sought places in the labour markets of the US, Britain and elsewhere in the past, we should now play greater role allowing in some social refugees as well as economic migrants from outside the EU.
It is one of the offshoots of economic success with which policy-makers must now grapple. So long used to dealing with economic under-performance, we must now grapple with the headaches of success, if our recent strong economic record is to be maintained.
