Small businesses, particularly in the distribution, retail and construction sectors, are markedly less optimistic about the prospects for the economy than they were a year ago.

The slowdown in housing and construction and the containing erosion of competitiveness are certainly feeding the mood of gloom. However, another important factor is that the government seems to have no effective game plan to tackle the challenges we face, apart from mouthing the usual platitudes.

Competitiveness challenge The single biggest challenge facing small business in Ireland is the competitiveness challenge. The cost of doing business in Ireland has increased significantly due to a mixture of high inflation, strong growth in wages (in particular public sector wages), increases in the cost of state services and a greater burden of regulation. The simple fact of the matter is that is at least 8% more expensive to do business in Ireland now than it is in Britain.

So what has the government been doing to tackle the situation? Not a lot, and what it has done has been PR-generated, not policy-driven. Put under pressure by Eddie Hobbs (and Fine Gael) to tackle inflation, the government decided in a blaze of publicity to abolish the Groceries Order. Fine Gael opposed the move because we did not believe it would affect prices but it might well have a significant impact on small suppliers to the multiples.

Well, abolishing the Groceries Order had little or no impact on the price of food, though it did lead to a drop in the price of drink. Considering that the consumption of drink has increased by 17% in the last 11 years and that drink-related deaths have doubled over the same period, I would not have thought this should have been a key policy priority for the government.

Government is the problem As any economist could have pointed out to the government, food inflation was never the real problem. Between 2000 and 2006 the consumer price index rose by 27.5% and food prices rose by 16.2% . . . well below the overall rate of inflation.

So what has been driving Ireland's high rate of inflation? Water, refuse and miscellaneous services increased by a whopping 239%; electricity rose by 52%; motor tax by 27% and rail transport by 32%. In other words, the main price increases have been in services provided by government or in utilities regulated by government.

The Dick Turpin of Rip-Off Ireland is not the private sector, it is the government.

For a start, government needs to start a process of real reform in the delivery of public services. We need value-for-money government.

In the last two years, 35% of all the new jobs created in Ireland have been in public services. Yet I know of noone who would say we have seen a 35% improvement in the quality of public services.

On the contrary, in a lot of areas we seem to be going backwards. Controlling public-sector pay is key to this, though to be honest, given the pay awards the members of cabinet have recently awarded themselves, they will have no credibility in asking for public sector pay restraint.

Lacks courage Given the government's record I am not optimistic that it has the courage to take the tough decisions needed to restore Ireland's competitiveness. I am concerned, however, that we will see more PR-driven action.

For example, the Competition Authority in the UK has released a report arguing for a relaxation in the planning rules to allow more out-oftown shopping outlets, which supposedly will increase competition. We may well see similar calls here to amend or abolish the retail planning guidelines, which place a cap on the size of shops and support town centres rather than out-of-town retailing. Such a move would have little impact on inflation but would have a disastrous effect on the economies of towns and villages across Ireland, destroying main street businesses and sucking the economic life out of communities across the country. It would be a tragedy if Ireland were to follow the British example. God knows, we have made enough of a mess of planning in Ireland without compounding it with strip-malls.

Tackling the competitiveness challenge is crucial to Ireland's future prosperity and the future of Ireland's small businesses. It demands tough decisions by the government, but based on its record I am not holding my breath.