The Central Bank has warned that the economy is either overheating or very close to it, with rising house prices one of the main symptoms.

It has warned the Government not to inject too much money into the economy in the Budget, saying that it is not the time for fiscal policy to give an extra boost to an already fast-growing economy. However, it does see some room for further income tax reductions if they are part of a Budget which does not add too much demand to the economy.

Also, the bank warns, ahead of negotiations on a replacement to Partnership 2000, that wage developments must not be based on "expectations based on the exceptional growth of the recent past."

The Bank's assistant director general, Dr Michael Casey, warned that labour shortages, wage pressures, creaking infrastructure - and rising house prices - all point to overheating and are a "matter for concern".

The report itself points to "abundant signs" that the economy is now close to overheating.

Many of these factors have been evident for the last few years, but the economy has continued to boom. But, according to Dr Casey, this is now beginning to change. He points to the balance of payments, which is likely to be in deficit for the first time in years in 1999. This is because we are beginning to suck in more imports as exports rise less rapidly.

Nevertheless, the Bank does not see a major risk of a house price "crash". Comparing the Irish market to London in the 1980s is not realistic, he said. Apart from the doubling of interest rates there to 15 per cent, the London market was also largely driven by speculators while the Irish market is more driven by fundamental factors, Dr Casey said.

The Bank points to the key role of fiscal - or tax and spending - policy in managing the economy, with control over interest rates having moved to the European Central Bank. According to Dr Casey, talk of a huge pot of money in the Budget is not "terribly encouraging" at a time when a big injection of money could fuel consumer demand .

The main concern of policy should be to slow gradually the growth in domestic demand, especially consumption, which has been growing for a number of years at 7 to 8 per cent per annum, to a rate that "is closer to a long-run sustainable growth rate."

While warning against a big "give-away", the Bank is not trying to rule out further income tax cuts. It says it would be desirable to continue progress in cutting taxes which still "bear heavily on wages and salaries on relatively modest levels of income".

It adds that a net stimulus to the economy must be avoided. This would mean actual spending cuts, which even the Central Bank probably realises are politically unrealistic in the current environment. On infrastructural investment, the Bank suggests that, given how stretched the construction sector already is, it's difficult to see how a large boost can be given through extra spending. It questions, however, whether existing infrastructure is being used optimally.

"It may be necessary to consider more explicit charges for users of facilities in the transportation and utilities areas," the Bank says. This would probably involve road and water charging.

"Current and future wage settlements must recognise the likelihood of a reduction in growth to a more sustainable level as well as a possible slowdown in foreign direct investment, which has been a major driving force behind the recent strong growth phase."