The Government must now choose between a tight fiscal policy with severely limited tax cuts, as advocated by the Economic and Social Research Institute, and the more generous tax-cutting approach of the National Economic and Social Council (NESC), designed to deliver a new social partnership agreement.

The political and economic risks involved in both approaches are considerable. All Charlie McCreevy can be sure of is that he will be criticised no matter what he does. And if things go badly wrong and an economic shock rips our growing property bubble apart, the resulting recession could catapult Fianna Fail onto the opposition benches after the next general election.

The struggle is between short-term and long-term economic planning - and the willingness of workers to postpone demands for a fairer share of economic growth.

The NESC, with representatives from Government, employers, trade unions, farmers and the voluntary sector, is preparing an outline for a new national agreement, envisaging a trade-off involving tax cuts and moderate wage increases, but with the focus shifting to the improvement of public services. At the same time, it recommends that growth in current Government spending should be limited to 4 per cent.

That scenario is shaped by the real, political world, by horse-trading between representatives of the social partners. And - because national agreements are all about solidarity and growth - it side-steps the prospect of a sudden, nasty recession.

The ESRI has no such inhibitions. While it joins with the NESC in predicting average growth rates of 5 per cent until the year 2005, it waves a red warning flag over our growing property bubble and advises the Government to err on the side of caution. That means reducing budgetary tax concessions to £100 million or less until 2002, or until the economy slows down. Only then, it says, could the Government safety increase tax give-aways to £700£800 million a year.

Given that tax concessions have run at £200£250 million under Partnership 2000, in deals designed to limit pay demands and increase take-home pay, the halving of such concessions at a time of unprecedented Government surpluses would go down like a lead balloon. Already, SIPTU has talked of concessions amounting to £1,000 million in the budget on December 1st.

HOUSE price inflation is the worm in the rose. The property bubble, so long dismissed as a social irritant rather than a threat to the economy, is finally being taken seriously. Three years of official fumbling and ineffectual action to stem a roaring property market has led to an unsustainable position. And while the ESRI acknowledges that the bubble may yet deflate gradually over time, the threat it poses to the economy could plunge us into recession if we are hit by an external economic shock.

It's not a popular message. In fact, the ESRI admits that its advice on deferring tax concessions "runs counter to the expectations of the vast majority of the population . . . it is true that the public finances are strong enough to allow for significant tax cuts or spending increases but it is wrong to expect that the Government should fuel the current boom in domestic demand at this time."

Rising disposable income translated into an increased demand for housing, it explains, and "the one instrument available to the Government to ease housing market pressure is to take money out of the economy". It also proposes the removal of all fiscal incentives to investment in housing.

But it is not all doom and gloom. In fact, the ESRI's economic forecast is remarkably upbeat in tone, even if some of its proposals are politically difficult to implement.

Growth rates of at least 5 per cent are expected until the year 2005 and, because of the underlying strength of the economy, external shocks would delay, rather than halt, development. All going well, real after-tax wages would grow by 3 per cent a year over the next decade, half as fast again as in the 1990s.

During that time, the ESRI expects to see a shift from high-tech manufacturing to market services - especially internationally traded services - as the engine of growth. Biotechnology and e-commerce would come into their own. Fiscal policy would generate considerable budgetary surpluses and allow the entire national debt to be paid off within 10 years.

New legislation and taxation initiatives would be required, such as a carbon tax, water charges, the encouragement of afforestation and changes linked to regionalisation.

But the key strategic decisions required are identified as: heavy investment in infrastructure allied to major changes in the planning and implementation process; a renewal of social partnership; tightening fiscal policy and severely limiting tax cuts over the next two years in return for substantial tax reductions when the economy slows down; and the need for a comprehensive programme of tax and welfare reforms to ensure a sharing in the fruits of growth.

Now, Charlie McCreevy and Bertie Ahern may well judge that a renewal of social partnership will be more beneficial to the economy than a tight fiscal policy that could shatter the social contract and encourage further wage pressure within the public service.

But if an external shock knocks the economy off course and causes the housing bubble to burst, the opposition parties will make hay. They will point to the advice of the ESRI and blame the pain of householders labouring under the burden of negative equity on the Government. Householders generally vote, and if they suffer pain, they are likely to blame the Government.

Here is what the ESRI threatens if the purse strings are loosened prematurely. A rise of a mere 2 per cent in EU interest rates could "burst the potential bubble in the housing market with a very rapid downward adjustment in prices." A 3 per cent drop in growth levels would take three or four years to redress. And, if the banking system found itself over-exposed in the property market at home or abroad, the situation could be much more severe. In the same vein, a sudden 25 per cent fall in the value of US equities could to create a four-year recession and a collapse in house prices. And, at home, a failure to deliver on infrastructural development, coupled with excessive wage rises, congestion and inappropriate fiscal policy would have the same general result.

It all came back to housing; the responses by Noel Dempsey and other ministers to the growing property bubble and the unavailing efforts of the Central Bank to get the financial institutions to rein in their lending policy. The Government's failure to cool the property market now threatens the overall health of the economy.