The bias towards investing in property should be phased out by adjusting the tax regime, according to a paper delivered at the annual conference of the Dublin Economic Workshop yesterday.
ESRI economist Iulia Traistaru-Siedschlag said that, while it had been successful until now, preparation was needed to manage risks to Ireland's economy from the housing market, as well as from the global economy.
The conference, which takes place in Kenmare, Co Kerry, this weekend, will hear speakers address a range of topics from the impact of immigrants on the Irish labour market, the telecommunications sector and transport policy.
The conference highlight is due to be a debate this evening between Tánaiste Michael McDowell and Labour party leader Pat Rabbitte on the subject of "An Economic Agenda For The Next Government".
Ms Traistaru-Siedschlag added that more needed to be done to ensure that the economy reached its full potential.
Her paper proposes phasing out tax relief on mortgage payments, taxing imputed rental incomes and a property tax on vacant or secondary dwellings.
She said investment funds needed to be diverted away from residential property and into more productive types of investment if the economy's full potential was to be realised.
She added that measures were needed to prevent excessive borrowing.
"Limits on the use of real estate as collateral can serve to protect the banking system against over lending," she said yesterday.
Turning to budgetary policy, she said future governments could improve the economy's defences against a downturn in the world economy by running surpluses and making the domestic economy more competitive. "The resilience of the Irish economy will be fully tested by a downturn," she said.
In its latest quarterly bulletin, the Central Bank last Thursday called on the Government to restrain public spending growth to a rate of 9 per cent.
Also addressing the conference last night, World Bank economist Patrick Honohan said that the role of the financial sector in Ireland's economic performance had been to facilitate rather than drive growth.
"Despite the striking achievements of the IFSC, there is little evidence of Irish finance making a leading contribution to the 20-year growth success of the economy," Dr Honohan said.
But he added that the sector had been successful as a "watchdog" during moments of economic crisis .
