UPDATE 1-Bank of Italy dubious on government's budget forecasts
* Central bank sees growth below government forecasts
* Says budget interest rate forecasts not shared by market
* Italy 2015-2017 growth forecasts higher than Germany's
* ISTAT says budget tax cuts worth 9 euros per month to workers
ROME, Oct 29 (Reuters) - Italy's official projections for growth and interest rates are optimistic and the government should put in place automatic safeguards to ensure public finance goals can be met, the country's central bank said on Tuesday.
In parliamentary testimony on the government's 2014 budget Bank of Italy board member Luigi Signorini said the economy would grow 0.7 percent in 2014 after two years of recession, significantly below the government's forecast of 1.1 percent.
The budget, which aims to ensure Italy's fiscal gap falls to 2.5 percent next year from 3.0 percent, has been criticised by business, unions and many economists for not doing enough to spur growth by reducing spending and taxes.
The Bank of Italy's scepticism puts more pressure on Enrico Letta's fragile coalition government as ruling parties argue on how to change the package during its passage through parliament where it must be approved by the end of the year.
The pro-devolution Northern League party, in opposition to Letta's broad-left-right coalition, said after Signorini's testimony that it would present a noo-confidence motion in Economy Minister Fabrizio Saccomanni.
The average forecast of more than 20 analysts surveyed by Reuters this month forecast 2014 growth of just 0.5 percent, and from 2015 to 2017 the government's forecasts of growth approaching 2 percent look even more optimistic.
Those forecasts "assume the full impact of structural reforms whose timing is uncertain," Signorini warned.
Moreover, the budget plan assumes the interest rate differential between Italian benchmark 10-year bonds and their German equivalent will fall steadily from the current level of around 2.4 percentage points to a steady 1 point in 2016-2017.
Signorini warned this assumption, implying billions of euros of savings in debt servicing costs, is not shared by financial markets and "entails a wide margin of uncertainty."
To bolster the prospects for reducing the deficit and public debt the government should put in place measures to automatically tighten fiscal policy if the budget's assumptions prove unrealistic, he said.
The budget's projections that growth will strengthen to 1.7 percent in 2015 and 1.8 percent in 2016 have raised eyebrows among many economists who estimate Italy's potential, or non-inflationary growth rate at no more than around 0.5 percent.
Italy has posted average growth of less than zero since 2002 and has been one of the world's most sluggish economies for the last two decades.
Germany, the euro zone's economic powerhouse and strongest exporter, made significantly more conservative growth forecasts in its own budget of just 1.4 percent for 2015 and 2016.
Saccomanni, addressing the same Senate panel after Signorini, defended the budget, raised his previous growth forecast for 2014 to 1.1 percent from 1.0 percent and said he expected 2017 growth of "around 2 percent."
Saccomanni, a former Bank of Italy deputy governor, has departed from the policy of recent Italian governments of setting economic forecasts broadly in line with those of most international institutions.
Saccomanni said risks to the growth projections were political instability, an interruption of fiscal consolidation and a tailing off of structural reforms.
"Net of these risks our forecasts don't seem all that optimistic to me," he said.
The economy will contract by 1.8 percent this year, Saccomanni said, slightly more than the 1.7 percent he forecast last month, and he warned any budget changes to boost tax cuts must be offset by spending cuts or by raising other levies.
National statistics institute ISTAT, also giving testimony to parliament, estimated that cuts to payroll taxes set out in the budget would bolster the take home pay of the average worker by just nine euros per month.
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