The  State can afford to borrow €4bn to €7bn a year to build homes, the ESRI has said.

It can do this without creating undue economic risks, the think-tank said.

Failing to act to close the worsening gap between housing demand and supply runs the risk of rents and house prices spiralling higher.

The result could be social and economic damage, according to the report by Prof Kieran McQuinn. 

The reluctance of many policymakers and analysts to examine the potential for such large-scale public borrowing reflects attitudes coloured by the disastrous legacy of large budget deficits in the 1970s and 1980s followed by a devastating economic crash, he argued.

However, conditions in the Irish economy are now significantly different so budget deficits to support capital investment are justified and affordable, he said.

The State’s actively funding builders with €4bn of borrowed funds could contribute 18,000 new homes a year towards the 35,000 most experts agree are needed, relieving the pressure building on rents and house prices. 

Ramping up construction rapidly would present challenges, including finding skilled workers at least some of whom would have to be drawn from abroad adding short-term housing pressure. 

However, in the paper, Prof McQuinn argues that by underwriting large-scale construction of social or private homes the Government could improve the viability of the sector overall including for lenders. The could create a possible ‘crowding in’ effect, sparking further supply.

As things stand Ireland is expected to build fewer than 15,000 new homes this year and next, significantly fewer than before the pandemic and far short of what is needed by the population.

There is currently €2bn allocated under the capital budget for house building.

The Government will pay out another €1.5bn of taxpayersw’ money in rent supports under the Housing Assistance Payment (HAP) scheme. Prof McQuinn said this could be phased out once new homes are built and available for social housing.

Private construction alone will not solve the housing crisis even though demand is high, Prof McQuinn said. 

The reasons for that include changes since the last crisis that make it harder for developers to borrow to fund projects and rising construction costs, he said. 

In contrast as a funder the State benefits from historically low debt costs and the potential for high growth in the Irish economy.

That makes a deficit affordable if it is specifically for capital expenditure and managed within prudent and restricted conditions, the paper argued.

“Given the expected strong post-Covid-19 performance of the Irish economy and the likely continued low cost of sovereign debt, we argue that the adoption of a consistently negative Government primary balance can be pursued under a prudent and sustainable set of conditions,” it said. 

Even borrowing an extra €7bn a year could be done without breaching a conservative target for debt to remain at no more than 45pc of gross domestic product (GDP), he said.

While Irish GDP, a measure of the economy’s value, is notoriously high, a debt ratio of 45pc is comfortably within EU fiscal rules.