Ireland's booming housing market is likely to ease rather than crash, the OECD has said.
The central bank said earlier this year that rapidly climbing Irish house prices and big increases in household indebtedness were two of the main risks to a thriving economy, but the OECD offered some comfort.
"House prices may have overshot fundamentals to some extent, although this does not imply that they will fall significantly; and house building will eventually ease," the OECD said in an economic survey of Ireland.
Average Irish house prices have tripled in real terms in the last 10 years, faster than any other OECD country.
The global think-tank said a soft landing was the most likely scenario but a sharper fall could not be ruled out so the government ought to take steps to ensure the health of the public finances.
"Hence the government needs to leave plenty of breathing space by balancing the budget or running a surplus, curtailing tax breaks and pushing ahead with public management reforms to get better value for money from public expenditure," it added.
At 4 per cent of gross domestic product, Ireland's government savings rate is one of the highest in the OECD, and overall government accounts showed an estimated surplus of 0.5 per cent of national income in 2005.
"However, the government has budget for a deficit of 0.75 per cent of GNP in 2006 through 2008, thus providing some untimely fiscal stimulus to activity," the OECD noted. "And some sizeable long-term social expenditure commitments are being locked in at what could be the peak of a revenue cycle."
It said moving to a fully-fledged top-down budgeting system with the government setting a firm level for overall spending at the outset rather than after negotiations with individual departments, could help expenditure and planning.
It said Ireland should adopt a fiscal framework which focused on the medium term because that could cut the chances Ireland would repeat the sort of pro-cyclical spending seen earlier this decade.
Ireland has some of the highest rates of economic growth in the OECD, but the organisation said further progress would need strong productivity growth and increases in labour supply.
It said the main areas where policy could make a difference were competition, education, innovation and infrastructure.
The OECD added that competition reforms were needed in electricity and telecoms and that restraints in areas such as law, pharmacies and pubs should go.
The ESB still dominates the electricity market despite six years of efforts to liberalise the sector. The OECD recommended separating the transmission and production sides of the business.
In telecoms, the main problem was slow broadband uptake. The OECD said the regulator should fasttrack the process by which Eircom opens up its local loop.
It noted university funding was still a problem and mooted reintroducing tuition fees, backed by income-based loans.
To encourage innovation, the organisation suggested funding agencies could be amalgamated or better co-ordinated.
The group also said upgrading the country's infrastructure was essential to maintaining high rates of productivity growth.
"Rigorous cost-benefit analysis of infrastructure projects . . . should play a greater role in decision-making than has been the case in the past," the OECD said. "Moreover, an increasing number of projects should be financed by users".
To boost labour supply, more women needed to participate in the labour market, the OECD said, and this would be helped by expanding day and out-of-school care for children.