91Èȱ¬

Growth in the Republic of Ireland's domestic economy is expected to remain "robust" this year and next year, a leading think tank has forecast.

The Economic and Social Research Institute (ESRI) said modified domestic demand was expected to grow by 3.5% this year and 4% next year.

It said that risks to the economy included "stubbornly high" core inflation and some signs of a weakening export performance.

Consumer price inflation in Ireland fell to 6.6% in May though core inflation increased to 6.3%.

Core inflation is a measure which strips out volatile energy and food costs.

The ESRI said that may be a sign that inflation drivers are shifting from "external energy related pressures to domestic inflationary elements".

The analysis illustrates how the Irish government faces a balancing act in its upcoming budget between spending some of its large budget surplus without stoking inflation.

The government is forecast to run significant surpluses in the coming years as it reaps a corporation tax windfall.

The ESRI forecasts a surplus of €9.8bn this year and €15.5bn next year.

The coalition government has committed to setting up a sovereign wealth fund to invest much of this windfall but there is an expectation of personal tax cuts in the budget.

This month a budget watchdog, the Irish Fiscal Advisory Council, said the government should stick to its self-imposed spending rules to "avoid overheating the economy or increasing reliance on unreliable tax receipts".

It warned that if the government was to go beyond its own spending rule "it risks repeating the mistakes of the 2000s".