The country will be spared most of the €2bn in planned cutbacks if economic growth continues at current levels.
In one of the most optimistic assessments since the economic crisis began in 2008, the ESRI predicted there may be no need for a final austerity budget this year.
It forecasts the economy is set to grow by a “vigorous” 2.6pc this year and 3.5pc in 2015, a level which would make swingeing cuts unnecessary.
Budget 2015 will be the first budget in six years where the Government will have significant |leeway to stall the cutbacks, although it will press ahead with the introduction of water charges.
The Finance Minister Michael Noonan is due to unleash another raft of cutbacks as part of the five-year recovery plan in October.
However, the Government wants to cut taxes in next year’s budget and the positive economic outlook will make it more likely that the Coalition will follow through with its promises.
The ESRI is still factoring in the €500m to come from water charges next year, meaning it sees the remaining €1.5bn planned in cuts and taxes in the next Budget as no longer required.
However, Mr Noonan’s officials are playing down the prospects of changing the budget predictions at this stage. The Government’s target of cutting annual borrowing to 3pc of economic output by the end of next year, as agreed under the bailout, will remain unchanged.
However, the Department of Finance is due to make its own revised forecasts later this month.
The Stability Programme Update will set out the position six months out from Budget 2015.
But October’s Budget will be still based on the most up-to-date economic and fiscal data at that time, as endorsed by the Fiscal Advisory Council.
However, the Economic and Social Research Institute (ESRI) believes that we are approaching “the end of the very painful period” of economic hardship and 50,000 new jobs will be created this year.