Ireland can never compete on the worldwide stage on cost alone. Cliff Taylor, Economics Editor, examines the six major hurdles that the Government must overcome.

Competitiveness is now firmly at the top of the economic agenda. This week the Government announced a special Cabinet meeting on May 6th to discuss the issue. Yesterday's figures showed that inflation here remains stubbornly high at twice the EU average, meaning that we are continuing to loose ground in terms of cost competitiveness.

Costs are important - even some IFSC firms feel wage costs here are too high - but the competitiveness agenda goes much wider. The goal is an environment where high-value firms can thrive - so issues such as infrastructure, a skilled workforce and the research base are vital.

Ireland can never hope to compete on costs alone, as we will be beaten every time by the economies of eastern Europe and the Far East. But what is vital is that we can undertake medium- and higher-value activities competitively and that productivity rises sustainably. The following are some of the key issues.

Inflation and costs: The slowing economy and the strong euro will help to bring down inflation over the next year or so, although yesterday's figures suggest it could be a long haul. Unfortunately, inflation has been above EU levels for some years, so we now have ground to make up.

The Government needs to commit to play its part in bringing inflation to 2 per cent, the target set by the Taoiseach in his IMI speech. This means no increases in VAT and excise rises at most in line with inflation over the next couple of budgets.

To help break the inflationary psychology, the Government must also commit to controlling other costs that come under its control. A key area is energy prices, where a formula still has to be found to introduce genuine competition into the market, raising issues of cost and supply. The Electricity Regulator is shortly to move to tender on two new power stations, but the Government must ensure a clear framework for competition and investment is set in this area as a matter of urgency. Costs are also out of line in parts of the telecommunications market.

The Government must also do all in its power to hold down other costs of non-traded goods and services. Some of these fall within its control or influence - TV licence prices, hospital charges, e.t.c. A big rise in local authority rates is a key issue for companies. Others require vigorous competition policy, an issue dealt with below.

And it might also study further why retail prices here appear well above the euro average. Some economists see a case for pro-actively encouraging competition in the retail market. Mr John FitzGerald of the ESRI says a possibility would be for the Government to provide sites for a Continental EU supermarket chain, which could boost competition, partly by sourcing in euros.

Wages: The new national programme - Sustaining Progress - will lead to some slowdown in the unionised parts of the private sector, leading to annual wage growth of around 3.5 per cent this year.

The economic slowdown and the consequent rise in unemployment will do even more in much of private industry to slow wage growth.

It is therefore essential that when the time comes to negotiate the wage increases for the second half of the three-year deal - starting in September 2004 for the private sector - that consumer price inflation is down sharply, so that moderate increases could still give real improvements to employees.

The main impetus of wage pressure on inflation will come from the public sector, due to the terms of the benchmarking deal, which offer 8.9 per cent on average over and above the Sustaining Progress terms.

It is important that the mechanism put in place to ensure productivity gains in return for these increases works properly.

However, this will not be easy, as many of the key issues were left subject to further negotiation.

The risk is that higher wages will inevitably lead to either higher taxes or higher costs for public services - or both.

Competition: Creating a competitive environment in all areas is a vital goal of Government policy. This helps hold down costs and inflation, while ensuring high-quality services.

The Taoiseach indicated to the IMI that this was a priority, but these words must be backed up by action.

Over the coming months the Competition Authority will produce recommendations on all the major professions and the Government must act quickly on these.

A key issue will be liberalising access to many professions. At the moment the legal profession controls and runs its own training courses, while the Pharmaceutical Society of Ireland must approve training courses for its industry.

This - along with a string of other restrictive practices - must end. The Competition Authority is also studying financial services, another key economic area. And competition can also play a role in a range of other areas, such as transport and in the provision of a second terminal at Dublin airport.

Infrastructure: There are crucial issues in developing infrastructure under the National Development Programme, where cost over-runs and delays have bedevilled major projects. A mid-term review of the programme, due this summer, faces some crunch decisions, at a time when resources are no longer plentiful.

The Government needs to set new priorities and ensure they are carried through on time and on budget.

This will require a realistic assessment of what can be achieved, the allocation of a multi-annual budget and clear rules on how funds will be raised and how the private sector will become involved - key issues that have still to be clarified following the establishment of the National Development Finance Agency.Planning delays on major projects must also be addressed through further streamlining the approval process

Regional broadband investment must also be a priority as well as a programme to accelerate its uptake, as the Irish economy lags well behind in this key area.

Research: The goal for industrial development is, using the jargon, to move up the "value chain" towards the production of higher-value products. This requires a strong research capability. But figures quoted by the National Competitiveness Council show us ranking 11th out of 16 OECD countries in terms of business research spending.

The Government has established Science Foundation Ireland (SFI), which funds research in biotechnology and information technology. While it got a significant increase in 2003 funding, there was a "pause" in investment in the key Programme for Research in Third-Level Institutions.

This has cast doubt over some research programmes and does not indicate a thought-through strategy: why get the SFI to attract top researchers and then not provide the required labs and facilities?

The science community and industry require a clear commitment. A multi-annual programme should be set out, rather than leaving this crucial area to the vagaries of the annual budget.

Skilled workforce: The fall-off in science studies in second-level and graduates in related disciplines at third-level is a serious concern. The Government has two reports - The Task Force on Physical Sciences and The Third Report Expert Group on Future Skills Needs. The message is similar. Investment is needed at second-level in science facilities and similarly at third-level to create places in information and communications technology. The sums of money involved are not enormous - a capital investment of some €300 million and lesser expenditure on an ongoing basis. If we are serious about developing a high-value economy, then these are investments that have to be made.