Bank of Italy dubious on government's budget forecasts

Reuters

* 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 toworkers

By Roberto Landucci

ROME, Oct 29 (Reuters) - Italy's official projections forgrowth and interest rates are optimistic and the governmentshould put in place automatic safeguards to ensure publicfinance goals can be met, the country's central bank said onTuesday.

In parliamentary testimony on the government's 2014 budgetBank of Italy board member Luigi Signorini said the economywould 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 to2.5 percent next year from 3.0 percent, has been criticised bybusiness, unions and many economists for not doing enough tospur growth by reducing spending and taxes.

The Bank of Italy's scepticism puts more pressure on EnricoLetta's fragile coalition government as ruling parties argue onhow to change the package during its passage through parliamentwhere it must be approved by the end of the year.

The pro-devolution Northern League party, in opposition toLetta's broad-left-right coalition, said after Signorini'stestimony that it would present a noo-confidence motion inEconomy Minister Fabrizio Saccomanni.

The average forecast of more than 20 analysts surveyed byReuters this month forecast 2014 growth of just 0.5 percent, andfrom 2015 to 2017 the government's forecasts of growthapproaching 2 percent look even more optimistic.

Those forecasts "assume the full impact of structuralreforms whose timing is uncertain," Signorini warned.

Moreover, the budget plan assumes the interest ratedifferential between Italian benchmark 10-year bonds and theirGerman equivalent will fall steadily from the current level ofaround 2.4 percentage points to a steady 1 point in 2016-2017.

Signorini warned this assumption, implying billions of eurosof savings in debt servicing costs, is not shared by financialmarkets and "entails a wide margin of uncertainty."

To bolster the prospects for reducing the deficit andpublic debt the government should put in place measures toautomatically tighten fiscal policy if the budget's assumptionsprove unrealistic, he said.

GROWTH LAGGARD

The budget's projections that growth will strengthen to 1.7percent in 2015 and 1.8 percent in 2016 have raised eyebrowsamong many economists who estimate Italy's potential, ornon-inflationary growth rate at no more than around 0.5 percent.

Italy has posted average growth of less than zero since 2002and has been one of the world's most sluggish economies for thelast two decades.

Germany, the euro zone's economic powerhouse and strongestexporter, made significantly more conservative growth forecastsin its own budget of just 1.4 percent for 2015 and 2016.

Saccomanni, addressing the same Senate panel afterSignorini, defended the budget, raised his previous growthforecast for 2014 to 1.1 percent from 1.0 percent and said heexpected 2017 growth of "around 2 percent."

Saccomanni, a former Bank of Italy deputy governor, hasdeparted from the policy of recent Italian governments ofsetting economic forecasts broadly in line with those of mostinternational institutions.

Saccomanni said risks to the growth projections werepolitical instability, an interruption of fiscal consolidationand a tailing off of structural reforms.

"Net of these risks our forecasts don't seem all thatoptimistic to me," he said.

The economy will contract by 1.8 percent this year,Saccomanni said, slightly more than the 1.7 percent he forecastlast month, and he warned any budget changes to boost tax cutsmust be offset by spending cuts or by raising other levies.

National statistics institute ISTAT, also giving testimonyto parliament, estimated that cuts to payroll taxes set out inthe budget would bolster the take home pay of the average workerby just nine euros per month.

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