Another national wage agreement, combined with reductions in income tax, is vital if Ireland is to maintain its competitiveness, a new report compiled for ISME, the small firms lobby group, has claimed.

The report's author, economic consultant Mr Paul Tansey, has also said the Government would have to consider giving tax allowances on housing to encourage Irish people to return to Ireland to take up jobs. He said this was important as skills shortages are emerging and it is difficult to attract emigrants, especially for the hi-tech sector.

The Minister for Public Enterprise, Ms O'Rourke, speaking at the launch of the report yesterday, said she believed that tax measures in the forthcoming Budget would also play a key role in whether there would be another national wage agreement.

The ISME report found that there was a "compelling case" for continuing with income policies, post Partnership 2000, to maintain labour cost competitiveness. It said that income tax cuts for those on below average incomes would improve labour market flexibility and increase the supply of labour, thereby helping to ease any emerging skills shortages.

"If tax cuts are not forthcoming then there will not be another national pay deal," Mr Tansey said, adding that tax cuts could be implemented through tax allowances rather than tax cuts per se.

Mr Tansey said that a new pay deal should make greater allowances for local bargaining than heretofore. He suggested that these could also include housing allowances.

ISME's acting chairman Mr Seamus Butler said take home pay was more important to employees than gross wages. He said that as currently envisaged, the minimum wage would be the Revenue Commissioners (through additional tax).

In his report, Mr Tansey said effective incomes policies are particularly important to the future success of most small and medium-sized businesses. Unlike high technology foreign enterprises, they cannot depend on high levels of productivity growth to solve their competitive problems.

Mr Tansey pointed out that following entry to EMU next year, any slippage in labour cost competitiveness would be punished severely. "Neither the exchange rate nor interest rates will be available to governments to offset competitive losses in the future.

Mr Tansey said Ireland was in a different economic cycle from the rest of Europe and he would worry about multinational companies post-2000.