The Central Bank recommended today that Government spending increases in 2002 should not exceed the expected revenue growth rate of 8 per cent in order to keep the State's finance in balance.
In its Autumn economic bulletin the bank said the public would have to temper expectations of future wage increases as the economy enters a slower growth phase.
The full implementation of benchmarking with spending capped at 8 per cent would require further revenue via tax rises or throughcuts elsewhere, the bank said.
Irish inflation is running at twice the euro zone average and a differential of two percentage points appears embedded in the Irish economy due to the sheltered services sector, the bank added.
The bank described Ireland's current inflation rate of 4.8 per cent as "at the outer reaches of what is tolerable."
The bank said that a small budget deficit, given the sluggish economy, can be "generally acceptable". The bank described the expected euro750 million shortfall in the exchequer as a "dip" rather than a plunge and added that Ireland's overall budgetary position remained healthyin the context of the EU's Stability and Growth Pact.
The Central bank saidthe domestic economy should grow at a faster pace of 4.25 per cent next year, compared to 3 per cent this year.
In its assessment of the global economy the bank said the expected recovery has shown to be weaker than expected and considerable downside risks remained.
The bank cited the fragile US economy, volatile stock markets and weak corporate earnings in its cautious assessment.