The number of people working in the public sector should be reduced by about 6,000, according to the small firms group ISME.

The group said that the Minister for Finance, Mr Cowen, needed to introduce a prudent Budget next month and keep a tight control on public spending.

It also said the Minister should oppose any attempts to have a second benchmarking agreement for the public sector. Instead he should introduce a performance-related pay system.

ISME said that there should be 6,000 fewer people working in the public sector and a "value-for-money audit" should be undertaken in each Government Department. In its pre-budget submission, the group also said the Minister needed to be "sensible" in his spending policy.

"Since 2000, current day-to-day expenditure has increased by €11 billion, a considerable figure, with no noticeable improvement to public services. It is essential that Government expenditure, particularly the public sector pay element, be kept to a minimum," the submission said.

The group also called for a new approach to public sector pay, with a new round of benchmarking due to be discussed next year. "The advent of benchmarking II, due to be negotiated from the middle of next year, should be knocked on the head and replaced with performance-related pay," it added.

The association said that economic indicators were "masking underlying problems in the economy" with the manufacturing sector struggling with rising costs and competition.

It said small and medium-sized enterprises should receive a fee for administering the tax collection system. It said this could be done by deducting 4 per cent from employer's PAYE/PRSI and VAT monthly repayments.