The Small Firms' Association's (SFA's) eighth annual employment survey makes interesting reading. The creation of 36,000 jobs would, under normal circumstances, be greeted with fanfare.

However the SFA report shows that this figure hides significant problems that hinder the economy's ability to create sustainable, long-term, high-skilled, value-added jobs into the future. SFA analysis shows the economy's ability to create jobs is at 1995 levels.

The economy has shown great resilience over the past year in dealing with a series of economic reversals, including the foot-and-mouth crisis, September 11th, reduced numbers of overseas visitors and huge increases in insurance, energy and rental costs.

However, further threats are emerging from the uncertainty of the timing and pace of recovery in the US, possible increases in interest rates and the value of the euro, wage increases way ahead of international competitors, and an inflation rate more than twice the European average. There is also significant growth in public spending against a backdrop of falling exchequer receipts.

Furthermore, slippage is forecast in addressing the infrastructural deficit across public transport, telecommunications, waste management and public utilities, which will add to the cost base of the traded sector.

Because of difficult trading conditions in domestic and international markets, any loss of competitiveness will have serious consequences on employment prospects. The economy has shed more than 3,500 jobs since the beginning of 2002 and Irish companies are facing increased competition from low-cost economies.

This will be a difficult year for employment and, despite the prospect of creating 36,000 jobs, the economy will suffer a significant downturn in relative employment creation with demand for new labour at 6.5 per cent, down from 7.8 per cent in 2001 and 10.9 per cent in 2000. The corresponding figure for new jobs in 2001 was 45,942 and 64,201 in 2000.

The underlying trends within the report show serious cause for concern. There has been a dramatic decline in recruitment, with just 43 per cent of small companies with vacancies, down from 63 per cent in 2001.

While there is evidence in the report that the labour market is less rigid, companies seeking to expand are hindered by a range of factors, the main one being unrealistic salary expectations. Lack of skills was cited by 49 per cent of respondents as a difficulty in filling vacancies.

Demand for general operatives continues to decline, which makes it more difficult for non-skilled workers who lose their jobs to find alternative employment. IT- related demand has declined by 25 per cent and demand for highly- qualified staff declined from 17 per cent in 2001 to 10 per cent in 2002.

The percentage of companies experiencing expansion problems due to a shortage of labour has declined to 22 per cent. The corresponding figure was 71 per cent in 2000. This decline in the capacity of small businesses to create jobs is occurring at the same time as our unemployment rate is rising.

Since 1995 small companies have demonstrated that, given the right environment, they will invest and create jobs. However, given the wrong environment they will consolidate or retrench.

As we move close to an election, the new administration will face a different set of industrial policy requirements to create employment and wealth that so much of its programme will be predicated upon. Central to achieving the right environment will be the ability of the economy to overcome the infrastructural deficit in areas such as roads, ports, public transport, energy and waste.

A strong focus must be kept on the Republic's cost competitiveness across a variety of indicators including labour, telecommunication, energy and insurance costs. Also management expertise, productivity, innovation, education, training, marketing, design and cost control will combine to create the right environment for business to survive, invest and expand.

Small indigenous companies will need access to a flexible and skilled workforce. Future industrial policy will need to improve the environment for innovation, research and development through greater availability of skilled personnel and closer links between the business sector, universities and institutes of technology.

The recent past has shown that encouraging enterprise, investment and reward for effort is essential. A priority must be to encourage the formation, survival and growth of the Republic's small businesses through the development of an enterprise culture. While much has been achieved, there remain many areas of policy that must be tackled.

Greater competition throughout the Irish economy will be a key contributor to increased competitiveness as will greater participation by the private sector in the funding and management of programmes traditionally managed by the public sector. The extent to which so much productive gain is absorbed by government expenditure, which in turn determines taxation, is the most serious issue that must be addressed to create employment and for investment and innovation to flourish.

Pat Delaney is director of the Small Firms' Association