The Exchequer finances are likely to be in the black by around £1.5 billion in 1999, according to the ESRI.

In its latest Quarterly Economic Commentary, the institute said it is already clear that the public finances will again be "exceptionally strong" this year, showing a general Government surplus of around £1 billion or 2 per cent of Gross Domestic Product (GDP) and this will rise to 2.5 per cent next year.

However, it said the main threat to its benign predictions is that pay increases could become unduly large if the disciplined approach to pay determination breaks down.

"There can be no doubt that this approach, with its guarantees of moderate pay increases and industrial peace, rewarded by massive job creation and reduced rates of effective taxation, has played a significant part in the success of the Irish economy over the past decade," the ESRI said.

The Government now faces the challenge of persuading a largely sceptical international audience that fiscal policy is already tight and convincing them that reneging on Partnership 2000 commitments - by not delivering promised tax cuts - would be counter-productive, the institute said.

Meanwhile, it must also persuade union members, particularly in the public service, that the consensus approach to economic management survives and that it offers by far the best hope of a sustained improvement in living standards.

"The pursuit of short-term sectional advantage contributed to a severe loss of potential living standards in the eighties and could do so again," the institute warned.

The ESRI expects Irish economic growth to remain strong by historical and international standards although it forecasts a slight slowdown from the 7.7 per cent growth rate of real Gross National Product (GNP) last year.

It predicts GNP will grow at 6.75 per cent this year, the fifth successive year of extremely rapid growth in the Irish economy, slowing to 5.5 per cent in 1999 as capacity issues such as labour shortages and a less favourable external environment take their toll.

Slow growth in Britain combined with a substantial fall in the value of sterling, which will lead to greater competition from UK suppliers, are likely to create a less buoyant and more competitive export environment. Irish exporters will also face stiffer competition from both Asian exporters and from the US as European currencies, including the pound, are expected to appreciate.

Although this could affect the rate of job creation, it is likely to remain high by long-term historical standards at about 3 per cent. This should see some 43,000 jobs created in 1999, down from 55,000 this year and an estimated 64,000 last year. Meantime, the jobless rate is set to fall to 9.2 per cent this year from 10.2 per cent last year, below the European Union average.

The outlook for inflation is reasonably positive. The ESRI says the evidence to date supports the theory that the acceleration in consumer price inflation in the first half of 1998 is related to past movements in the exchange rate rather than to generalised domestic inflationary pressures.