Taoiseach Bertie Ahern has acknowledged Ireland's competitiveness has been affected by the rise of the euro in a speech to an IBEC audience in Dublin.

Mr Ahern also said growth will be less dramatic and more sustainable in the future, while confirming that any fall off in economic growth would inevitably impact on the construction industry.

He said that while confidence in economic prospects remain high, with more than half of firms expecting increase in business activity over the next three months, it was clear the economy was "in a period of transition".

However, he also warned about productivity levels, saying innovation was the key ingredient to future economic success.

"Productivity in Ireland, as measured by GDP per person employed, is amongst the highest in the EU27 area," the Taoiseach said. "However, productivity growth has been unimpressive during the past few years. Ireland is no longer a low cost economy. Therefore, we have to compete in more imaginative and targeted ways than might have been the case up to now."

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He continued: "It is true that we are seeing a falling off in tax revenues. Construction accounts for a large share of the Irish economy. It is inevitable that any slowdown in activity in that sector will have a knock-on effect.

"In this new environment, it is essential that we follow prudent fiscal policies. Spending must grow in line with available resources. To do otherwise would threaten future improvements in living standards."

Through running fiscal surpluses and reducing debt burden, Mr Ahern believes a prudent, targeted investment in productive assets is required.

"But we must also ensure that the resources that are put into these assets are efficiently allocated and are achieving value for money," he said.

"We need better performance information, more meaningful indicators and more precise measurements."

The Taoiseach concluded: "A key strength has been the greater consensus it has created around the appropriate balance between different aspects of public policy on the one hand and competitiveness, labour, education and investment policies on the other.

"It is the management of these interlocking elements that has contributed to our past success. Any tendency by any group to "go it alone" or to emphasise one aspect at the expense of others carries risks."

(JM)