The deterioration in the Government finances is the single biggest problem now facing the economy, according to Mr Jim Power, chief economist at Friends First.

He has warned that, with spending cuts looming across a number of Government Departments and tax revenues falling, it is likely that the Exchequer finances will show a €1 billion deficit.

Mr Power also noted the sustained inflationary pressures within the economy, which he attributed to the "inappropriate policy environment" since 1999.

While the annual rate of price increases has eased since the beginning of the year, the June figures were somewhat alarming.

"These rates of inflation are horrendously high and clearly indicate the inflation culture that has taken hold in certain sectors of the economy that are relatively insulated from competitive forces," Mr Power said.

He highlighted communications as one area where Government policy to deregulate this sector has resulted in relatively low levels of inflation of around 3.2 per cent.

"This is one area of the economy that has been opened up and deregulated in recent years and there is a strong message for Government here."

Another sector requiring immediate attention was the insurance industry, he said.

This is an area where insurance costs are imposing a heavy burden for many small and medium-sized businesses.

"The tourism sector is also under severe pressure from rising costs and 2002 looks like being an extremely difficult year," Mr Power said.

Mr Power was also highly critical of the recently issued Benchmarking Report.

It failed to identify how the figures were reached and, as a result, there could be very little confidence that the process was as fair and as scientific as might have been expected, he said.

"It is also far from clear that all trade unions will accept the proposals and it appears likely at this stage that we could be facing into an autumn and winter of discontent."

He further cautioned that the affordability of the process must also be questioned.

Mr Power said there was a clear risk that Irish consumers would be forced to pay directly for benchmarking through higher taxes and reduced Government spending.