Government increases in excise taxes and administered prices are adversely affecting the competitiveness of Ireland as a location for internationally traded services, according to Mr Peter Cassells, Forfás chairman.

There is increasing evidence that the cost base of the economy, including pay levels, has been rising more quickly than can be justified by productivity growth, he writes in the agency's annual report, published yesterday. Forfás is the national policy and advisory board for enterprise, trade, science, technology and innovation.

A major contribution has been rapid price and pay inflation in domestically traded services, he said.

This has been exacerbated by lack of competition and rising excise duties and Government-administered charges, adds Mr Cassells.

The new national pay and partnership agreement offers evidence that "the social partners recognise the need to bring pay increases into line with productivity growth", according to Mr Cassells, a former general secretary of the Irish Congress of Trade Unions.

Pay moderation must come "in parallel with a slowing of other price and cost increases" in order to protect the real value of wage increases, he said, in a clear signal to the Government to avoid major indirect tax increases in the Budget.

The report confirms that total employment in State-supported industry fell last year, dropping by 9,500 to 304,000 by the end of the year.

This is the second year in a row that there has been a net decline in employment in companies supported by the agency, although Forfás annual report points out that it still stands 40 per cent higher than at the beginning of the 1990s.