The public sector pay bill should be capped and wage negotiations for public servants should be decentralised to individual departments, a new report from ISME says.

Capping or "severely pruning the growth in the public sector pay bill" would generate annual savings to the exchequer of about £300 million says ISME's Tax Reform 1998 - 2000 policy statement.

The organisation says the public sector element should be taken out of national wage agreements and individual departments should be given their own budgets and the ability to decide on pay increases, if any.

The organisation argues that if the public sector pay bill is capped it will help to restrain inflation and fund tax cuts for the low paid.

It adds that the public sector pay bill exceeded inflation by 300 per cent between 1990 and 1997, while the private sector had to show significant pay restraint.

The report says the early privatisation of State companies would also help prevent inflationary pressures building up.

This is possible if the proceeds from the sale of State companies are used to pay off a significant portion of the national debt.

As a way to encourage participation in the sale of State companies, ISME proposes capital gains tax be reduced to 7 per cent for those on or below the average wage.

It says State companies should not be sold on block to foreign interests. "Why can't we all have a share in these companies when they are being sold," said Mr Frank Mulcahy, ISME chief executive. The organisation called on the Tanaiste, Ms Harney, to reverse her plans to introduce a national minimum wage of £4.40.

Instead, it says, incomes of less than £10,000 should be exempt from tax and other deductions.

"The PAYE worker is more concerned with the purchasing power of his or her wage packet rather than its size, subject to income tax and other deductions," said Mr Mulcahy.

He added that tax deductions would be more beneficial to people on low wages than a minimum wage. "The average cost burden of the minimum wage per firm will be £8,000 and for many small firms that is not an insignificant burden," said Mr Mulcahy.

"Ironically while promoting the minimum wage as a means of addressing low pay the Government stands to gain, not insignificantly from the additional taxes which the proposal will generate," he added.

Dismissing suggestions the proposals are "politically naive", Mr Mulcahy said the measures should be taken now when the Government has the "scope to be radical".