The Economic and Social Research Institute has upgraded its growth forecast for this year to 6%, but says growth could be even higher.

It is forecasting growth next year of 4.5%. GNP is forecast to grow by 5.9% this year.

As a result, income per capita is now back at the level it was at the previous peak in 2007.

Because of this, the ESRI argues there is no macroeconomic justification for Budget 2016 to introduce a stimulus to the economy through some €750m worth of tax cuts.

It is arguing for a neutral budget - one that neither stimulates nor deflates the economy.

The authors say the Government needs to heed the lessons of the past and avoid pro-cyclical policy options.

In its latest quarterly economic commentary, the ESRI says the strong growth is producing extra revenues for the Government.

As a result the budget deficit could come in at 1.8%, compared with a target of 2.3% in the Spring Economic Statement and a 2.7% target in Budget 2015.

Under EU rules, the budget deficit had to go below 3% of GDP this year.

Next year the deficit could drop as low as 1.2%.

Using the institute’s "Nowcasting" estimate of growth using the latest short run indicators, the ESRI says growth in the third quarter of this year may be 1.68%, slightly ahead of the 1.5% quarterly growth in the first two quarters.

Rise in consumer spending and investment

A key element of the recent growth is the pickup in domestic demand, with both consumer spending and investment by firms increasing.

It says that while consumer debt is still very high, deleveraging (paying down debt) no longer appears to be holding back growth in consumer spending to the same extent as previously.

It says "this increase in consumption is tangible evidence that households are finally experiencing the recovery".

It cites the 31.5% increase in private car sales as an example, with 108,000 new private cars licensed in the first eight months of this year.

The ESRI believes consumer spending volumes will grow by 2.8% this year (compared with 2% in 2014) and by 3.8% in value.

In 2016 it forecast consumer spending growth of 3% by volume and 4.5% by value.

Nevertheless debt reduction remains a priority for the household sector, with repayment of loans exceeding drawdowns of new lending by €2bn in the year to July, leaving the stock of loans (mostly mortgages) down 2.8% to €93.1bn.

Outstanding mortgages declined by 4.4% while consumer lending declined by 2.5%.

The increased level of activity has resulted in what the ESRI calls a marginal increase in labour force participation in the year to the end of Q2.

The institute now believes unemployment will fall to 9% by the end of this year and to 8.4% by the end of next year.

The ESRI says that while building and construction activity grew by 10% last year, it is from a very low base of activity.

The key driver of construction appears to be commercial real estate, with the number of new housing units falling far below the numbers required to meet household formation rates.

It notes that while there has been a slight increase in the number of planning permissions in the first half of this year, the figure is at its lowest level since the records began on this statistic in the late 1970s.