The cost of labour and energy present the biggest problems for small Irish firms and are eroding their ability to compete globally, a new survey by the Small Firms Association (SFA) has found.

Eighty eight per cent of small firms view labour costs as a major problem, with 12 per cent calling it the most important single issue facing their company, the SFA Annual National Business Survey showed.

Wage costs are set to rise further under the national partnership agreement, Towards 2016, which proposes a 10 per cent pay increase over the next 27 months.

"The pay element of the new national agreement is at the very limit of what the country can afford," said Patricia Callan, director of the SFA. "However, it is now critical that productivity growth meets these wage increases in order for businesses to regain lost competitiveness in a global marketplace."

In addition to labour costs, the Republic's 233,000 small companies are concerned about rising energy bills, greater legislation and red tape, insurance costs, inflation and local authority charges, the SFA survey indicated. The association polled 1,177 member companies.

"Although labour costs remain the most significant problem facing small businesses, non-pay costs are exerting huge pressures on their ability to invest, develop, expand, and create new jobs," Ms Callan said.

About 77 per cent of small firms view energy costs as a major cause for concern, with increasing legislation following at 66 per cent. Insurance costs and skill shortages concern 56 per cent and 47 per cent of small firms, respectively.

The SFA said it was not surprised that energy costs ranked so high among the list of concerns, as record oil prices drive up inflation and as gas and electricity prices climb. A key ingredient necessary for the successful growth of an economy competing in the global marketplace, according to Ms Callan, is a business-friendly energy policy that ensures efficient and competitively priced delivery of energy.

Legislation and bureaucracy, meanwhile, have become more significant problems for small businesses, with 10.5 per cent and 8.8 per cent of companies respectively citing them as their biggest problem. Excessive regulation costs Irish firms about €582 million, the Government's White Paper on Regulation estimated, while SFA research has shown a firm employing eight people devotes half of one employee's time to filling out forms.

"It is the strongly held view of small business that enterprise development in Ireland is unnecessarily and severely handicapped by the amount of bureaucratisation and the costs associated with it," Ms Callan said.

"We cannot ignore the fact that regulation can result in higher prices and costs, a reduction in consumer choice, a reduction in flexibility and innovation, all of which are not conducive to businesses or the competitive environment they are trading in."