THE ritual mating dance to negotiate a new national agreement between the Government, employers and the unions is now in full swing. The initial poses have already been struck with the unions demanding a 10 per cent pay increase over three years, and IBEC predictably responding that this is out of the question.

But despite the posturing, the negotiations this year will be very different from what has come before.

For a start, we are now in an era of low inflation and low wage deals in competitor countries. In Germany, where the unions had been demanding a 4.5 per cent increase and the Government a two-year pay freeze in return, a deal worth 0.8 per cent of average income in 1996 and 1.3 per cent in 1997 was finally agreed at arbitration.

Our other large trading partners have struck equally austere pay deals. France has imposed a ceiling of 3.4 per cent for public sector pay in 1996 - it will only be paid in enterprises where the economic and financial situation permits. In Britain, a public sector pay freeze is in operation until 1998, although pay increases for 1.4 million public sector employees averaged 4 per cent this year.

All the increases must be financed by efficiency savings and productivity gains.

The public sector is one of the areas where the Government faces a tough negotiating task. If the Minister for Finance, Mr Quinn is to be believed, the public sector can expect to tighten its belt and may be asked to sign a clause forbidding industrial action.

Over half the public service, including lower-grade civil servants, nurses and teachers as well as local government and health board workers are involved in various disputes with the Government relating to the PCW.

Mr Quinn's hard-hitting speech on Wednesday, where he stressed the Government was not satisfied with the performance of public sector unions in the past, is seen as a direct attack on these sectors.

The teachers are being targeted because of their refusal to countenance 15 hours extra work over a year, while the CPSU has been castigated for its 11-week industrial action over the course of the PCW. The nurses too are threatening action.

Wage increases and productivity deals in the public sector are a crucial element in controlling Government spending, because they consume so much of the State's resources. The pensions bill for the public service is already higher than that for the rest of the State combined.

High public pay deals leave less scope for tax and PRSI deductions for private sector workers.

The Government hopes the public service unions - and their private sector counterparts - will agree to a lower wage settlement if they get a guaranteed tax cut. The unions have already made it clear that tax cuts of £859 million must be implemented over three years before they will sign an agreement.

The National Economic and Social Council foreshadowed a possible Government response in its recent report. It called for a reduction in the basic level of income tax from 27 per cent to 25 per cent and for a reduction in employers' PRSI to boost employment.

Profit sharing in companies was another way employees could share in the fruits of success without affecting the national agreement, it suggested, but this could provide a point of dispute between unions and employers.

At the same time, the Government is stressing the importance of meeting the Maastricht criteria - the rules the states must meet to qualify for entry to the single currency in 1999. This should keep the Exchequer finances in a strong position. But the new agreement faces another challenge safeguarding competitiveness when we join the single currency. We will have lost the flexibility of revaluing the currency.

It is the issue of competitiveness which will dominate the minds of the Government and employers in striking a new deal.