THE Central Bank should take a less cautious approach on interest rates, declaring a reduction as soon as possible, the Small Firms Association said last night. There is also an urgent need for the Government to reduce public spending, the lobby group said.

In its annual summer economic statement, the SFA expresses its concern at the current currency volatility, calling for last Thursday's rate rise of fifty basis points to be reversed.

"Interest rates have been increased very promptly in response to international developments, justified by the Central Bank on the basis of maintaining our ERM position and the need to avoid large outflows," the SFA said.

Such rises tend to be slow to be reversed, and small firms are worried that the rate increases add to cost pressures and affect growth, through both a downturn in domestic demand as disposable incomes are hit, and more expensive working capital, the SFA said.

"As a result, Government revenue will be lower and debt servicing will be higher than forecast, underpinning the need for Government to review spending plans," the document continued.

The Government must resist demands for "special case" treatment by other public service groups following the nurses' settlement, the SFA said.

"The major problem in economic terms now is the real danger that the Government once again has lost control of public sector pay, which will push Government expenditure beyond what is sustainable or compatible with tax reductions and the targeted budget deficit."

The SFA said it believed there was now a danger that the progress achieved through national programmes would be undone by "the continued failure to manage and control public service pay".

The organisation said that economic growth was being hampered by a skills gap in the labour market, and the failure to reduce the ranks of the longterm unemployed.

"The SEA estimates that at any one time there are in excess of 5,000 jobs available which cannot be filled," the document said. "In a rapidly changing business environment, education and training have not kept pace with demand."

The SFA also called on the Government to reduce the "tax wedge", thereby "increasing the real return for work instead of condemning people to longterm unemployment and the attendant social problems which this creates".