Next month's Budget may set the economy back further, but without it the country's national debt could reach 100pc of output (GDP) by 2011, the EU Commission has said in a new analysis.
The Commission is forecasting a decline of 1.4pc in Irish GDP next year. But Brussels is not taking the impact of next month's Budget into account, because the details are not yet known.
"Depending on the specific measures that are eventually implemented, a dampening effect on consumer demand cannot be excluded," the Commission says in its autumn economic forecast.
On the other hand, it says that faster correction of the economy's problems might give more support to consumption and investment by helping confidence.
The Government's plans include a correction of 4.3pc of GDP -- around €8bn -- in the Budgets for 2010 and 2011.
Unless there is a compensating boost from confidence, this could also reduce the modest 2.6pc growth forecast for 2011.
These forecasts are higher than those in the Commission's estimates last May, but it warns of the struggle facing the Irish economy in trying to return to strong growth.
It worries about the drag on future consumption as people try to reduce their debts, particularly from over-investment in housing. The recession is being driven by a lack of domestic spending, it says, with this year's fall in consumer spending the biggest in 25 years.
Pressures on household balance sheets also mean continued pressure on tax revenues. "The shift away from tax-rich domestic growth to export-led growth with sluggish employment and consumption growth, would lead to only a moderate tax revenue increase once the economic recovery takes hold," the report says.
The Commission said the recession in the EU had ended, saying the eurozone economy is set to make a gradual recovery in coming years, with growth of 0.7pc in 2010 and 1.5pc in 2011.
"The EU economy is coming out of recession," EU Economic and Monetary Affairs Commission Joaquin Almunia said.
However, the road ahead is a challenging one, he warned, with fears of further increases in EU unemployment.
The report expects firms to increase labour shedding in the coming quarters, with the jobless rate reaching 10.25pc in 2011.
"The financial crisis implies a number of risks for labour market developments -- including the possibility of a 'jobless' recovery, persistently high unemployment and a shrinking workforce," the report warns.