The Central Bank has warned the Government's planned Budget package of €9.4bn of additional spending is "too large" and "unnecessary".
Speaking to RTÉ's News at One, Minister for Finance Paschal Donohoe confirmed that the Budget would still contain spending "at or inside €9.4bn" despite the warning.
He said he always finds the contributions of the Central Bank and the Irish Fiscal Advisory Council "very helpful and very important in our Budget debate" and that the Taoiseach, the Tánaiste, and the Minister for Public Expenditure and Reform Jack Chambers "listen to it very carefully".
The Central Bank said the "sharp increase" in Government expenditure would impact on the public finances.
It also said there would be a larger underlying deficit than had been expected this year when one-off factors are excluded.
It said expenditure by Government departments had recorded strong growth so far this year and the ceiling for expenditure has been raised.
This means that when one-off factors are excluded the underlying deficit will be 3.3% of national income this year.
It said revenue collected by the State will moderate over the coming years leading to a deteriorating underlying deficit.
It added broadening the tax base by generating revenue from more sources is needed to help to pay for the increased expenditure envisaged under the National Development Plan and continuing the existing level of public services.
Minister for Finance Paschal Donohoe said he "accepts" the Bank's conclusion that spending over the last number of years has been at a high level.
"We need to moderate and pull it down, and this is what myself and Minister [for Public Expenditure and Reform] Jack Chambers are doing."
Mr Donohoe said they were "aiming to do this over a number of budgets, and make a big change in doing that in Budget 2026".
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The Central Bank also revised upwards its forecast for economic growth for this year and said the immediate impact of US tariffs will not be as damaging as expected earlier.
The bank expects the domestic economy to grow by 2.9% this year, a revision of almost one percentage point up from its previous forecast.
However, it expects more moderate growth over the coming two years with the economy expanding by 2.2% next year and 2.4% in 2027.
Minister Donohoe said the Government's aim would be to publish a "medium-term fiscal plan later on in the year, and a medium-term fiscal plan lays out what we believe the size of future budgets should also be".
Director of Economics and Statistics Robert Kelly said: "The economic outlook is not as favourable as it would have been had US tariffs not been introduced, but the tariff rates covering EU-US trade are lower than had been expected earlier in the year."
Research published by the Central Bank said national income would be in the region of 1% lower than previous forecasts over the next five to ten years due to US tariffs.
Mr Donohoe said the Government will argue that to invest more in Ireland's future, in the water, energy, roads and transport infrastructure needed to build more homes, it will mean there are other things that cannot be repeated.
He said it will be a "complex and demanding argument to make" while the cost of living remains high, and that choices need to be made so Budget surpluses and economic progress can both continue.
"The Central Bank are already critical that we are doing too much so we can't do any more than that," the minister said.
Reacting to the Central Bank analysis, Labour finance spokesperson Ged Nash said the evidence shows that Fine Gael and Fianna Fáil's reputation for fiscal responsibility is "wholly unwarranted".
He added: "The days of easy choices should be over and recent history shows you can't keep spending and cutting taxes and expect a good outcome."
He said there has been enough of boom and bust politics.
Housing
The bank also said it expected 32,500 homes will be built this year but has revised downwards its forecast for housing by 1,500 for 2026 and 2027 to 36,000 and 40,000 respectively.
Commenting on this, Minister Donohoe said that the figure was "about right", but that he was "hopeful" that "a little bit more" than 32,500 homes would be built this year.
Speaking to RTÉ's News at One, he said: "We know on the basis of decisions that have currently been made that the housing output that we have for this year and next year in particular, is lower than we want it to be.
"We accept we're not building enough homes, but we know we need to add to it and we're working on that in different decisions that have been made and will be made," he said.
He said when the Budget is finalised and when the National Development Plan says what is possible, it will "positively influence" housing output "beginning next year".
The development follows weaker than expected data for planning permissions published by the Central Statistics Office this week.
Robert Kelly said the focus in terms of capital spending "is the correct one" but space in the economy has to be created for that to happen.
"So in reality, when you put together the need for that capital investment along with large increases in current spending and tax cuts, the economy can't simply absorb all that. The big problem with that, potentially, is the value for money we'll get as we try to do that capital spending," he told RTÉ's Morning Ireland.
"The second element is, right now if you look across the economy, the tarrifs are not having the binding and strength we thought they might have in terms of the outlook," he said.
"So we don't need that stimulus. What that means is that if there was to be a risk further down the road, we wouldn't have the space or the capacity for the public finances to respond," he added.
Mr Kelly said there is a need to move away from broader measures that drive up a lot of current expenditure to more targeted measures for households that could be experiencing difficulty.
He also said they need to see more infrastructure in relation to the delivery of housing.
"We've had at least five to ten years now where that gap has been that there's more demand for housing than supply, so we have to try and close that gap," he added.
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Tax breaks
Asked whether there would be tax breaks for developers, Minister Donohoe said that final tax measures in the Budget have not yet been decided.
"We already have measures to support the delivery of homes in our tax code and what we will do is look at how we can encourage housing supply to increase further again, but I don't want to do what we did at other points that then ended up causing us such great difficulty that then led to fewer homes being built for longer," he said.
He said the scale of any tax package is determined by how much income the economy is generating, and there will be changes to carbon tax and PRSI to "widen the tax base" at a time when it is necessary to be "careful."
He said the Budget Surplus will enable money to be put aside in a fund to help keep the country "safe" in future.
Mr Donohoe said the Government has not made any decisions "yet" about whether VAT for hotels and restaurants will be cut in next month's Budget, but that "if we do one thing, it means there are trade-offs and choices that have to be made."
