The Exchequer will end in the year with a deficit of approximately €622 million, according to the Economic and Social Research Institute (ESRI).
In its latest quarterly bulletin, the independent think tank claims the deficit is due to a fall of 3 per cent in house prices and an overall slowdown in the economy.
The figure will represent a swing in the public coffers from a surplus of €2.2 billion in 2006 to a deficit of €622 million this year.
The ESRI says that GDP economic growth will slow to 4.9 per cent, as the housing market slows, and drop further to 3.7 per cent in 2008.
It also sharply reduced its forecast for the property market, estimating that the average house price will drop by 3 per cent this year.
Investment in housing will fall 4.7 per cent this year and by more than 6 per cent next year, it is predicting.
Publishing the report, economist Alan Barrett said a downturn should be seen positively as it is a return to a more sustainable economy, though the slowdown could be more pronounced if high inflation rates result in pressure on wages.
"Excessive" wage increases would be "troubling" at a time when growth in employment is slowing down, he said.
A less buoyant construction industry will mean employment growth will fall from 87,000 new jobs in 2006 to 58,000 this year and 25,000 in 2008.
The ESRI believes the number of workers coming to the Republic from overseas will also drop dramatically, with net immigration falling from 70,000 last year to 50,000 in 2007, and halving to 25,000 next year.
Unemployment, which ran at a rate of 4.4 per cent in 2006, will increase to 5 per cent next year.
Money from Special Savings Incentive Accounts is propping up consumer spending, it says, but once this money is spent, growth in consumer spending will tail off.
A research paper by UCD professor Morgan Kelly, published by the ESRI yesterday, suggests that a correction in the property market could be more severe, with prices falling by 5 per cent each year for the next decade.
Mr Kelly warned that in almost every recent example, worldwide property booms were followed by sharp downturns in the market.
Ruairí Quinn, Labour Party spokesperson on Enterprise, Trade & Employment, said the ESRI's call to curb wage increases was "missing the point entirely", saying that inflation needed to be brought under control.
Mr Quinn called on the Government to form a working group that would set targets and come up with measures to bring inflation back down to below 2 per cent within two years.