The  Irish Business and Employers Federation (IBEC) has warned that the economy needs to be carefully managed and has told the Government to continue to cut public spending but to be cautious about introducing new taxes.

Presenting its quarterly review of economic trends yesterday, IBEC's economic policy director, Mr Brian Geoghegan, also warned that any future pay increases negotiated under any new national wage agreement would be below the rate of inflation.

"We have lost competitiveness. We will have to think in terms of the ECB target rate for inflation of 2 per cent." He added that we would be "fooling ourselves" to award wage increases above this level.

Pay awards of about 2 per cent would be well below the rate of inflation which IBEC forecasts for this year and in 2003. In 2002 it suggests the rate of inflation will average at 4.6 per cent and moderate slightly to 4.3 per cent next year.

IBEC notes that average wage increases in main trading partner countries have been 2.5 to 3.8 per cent this year.

"We have to reverse what happened in the last few years. We will have to go through a period of pain. Reality is what is required," said Mr Geoghegan.

IBEC has reduced its growth forecasts for the economy in 2002 and 2003 and admits these figures may even prove to be overly optimistic.

IBEC now suggests that gross domestic product (GDP) will expand by 3.1 per cent this year, almost 0.5 of one percentage point below its forecasts of just three months ago.

In 2003, it believes the economic growth will pick up to around 4 per cent, again some 0.5 of one percentage point below its earlier expectations.

Mr Geoghegan suggested that certain sectors of the economy, particularly exports, remained very fragile and that the Government would have to make some tough decisions for an economic recovery to materialise.

As an immediate remedy, IBEC has again urged the Government to drastically reduce the rate of growth in public spending.

This would be the first step towards alleviating the pressure on the Exchequer finances, it says.

"There is a need to bring balance back to the economy. When an economy moves out of balance the problems manifest themselves at pressure points," it states.

One of those pressure points is persistently high rates of inflation, some of which has been fuelled by higher Government spending in areas such as health and education.

Mr Geoghegan stressed that everyone must think in terms of reducing inflation.

"We are losing jobs, it is inevitable that we will lose more unless we sit up and take notice. Everybody needs to think of lowering the rate of inflation."

The current economic woes are rooted in excessive spending with IBEC warning that spending must be brought under control.

The sharp collapse in tax revenues continues to put pressure on the public finances but IBEC has warned the Minister for Finance to think carefully before introducing new taxes as a means to balance the books.

There has been some mention of raising indirect taxes, but IBEC suggests this would in turn add up to 0.5 of a percentage point to the rate of inflation in December and rise to 5.1 per cent in January, averaging at 4.8 per cent in the first quarter of next year.

It has also stressed that the Government must honour its commitment to continue to reduce corporation tax to 12.5 per cent. Any attempt to reverse that pledge would hinder and prevent investment.

"It would send shock waves throughout the multinational sector," according to Mr Geoghegan.