Tax revenues will undershoot Government forecasts this year by at least €1.2 billion, according to Davy Stockbrokers. The shortfall will be due largely to lower than expected returns from two property-related taxes - stamp duty and capital gains tax.

Two further quarter point interest rate increase foreseen by Davy - in September and December - may further dampen sentiment in the property market.

The revenue pressures mean the Government may be required to run a deficit next year for the first time since 2002, Davy economist Rossa White said yesterday.

The stockbroking firm is forecasting that the economic growth as measured by gross national product (GNP) will grow by 3 per cent next year - a prediction lower than other forecasts.

But Davy economist Robbie Kelleher stressed that 3 per cent growth would still be a good performance given the anticipated decline in housing. "We're a bit puzzled as to why people think that's bearish. It is a very benign outcome if it pans out like that."

The extent of job losses in the construction sector and their knock-on effect on the economy will become clearer in the next few months, Davy said.

The stockbrokers said it was crucial that the Government meets its commitments under the National Development Plan (NDP) in order to compensate for the inevitable loss of jobs in the housing sector.

Tax cuts in the next Budget will also be required to help consumers cope with the impact of higher unemployment and a spending hangover after money from Special Savings Incentive Accounts (SSIAs) is used up.

A pick-up in exports, which are rising at their fastest pace for six years, will also help the economy cope with the downturn in housing, Davy said.