UPDATE 2-Morocco plans only limited subsidy cuts next year to reduce deficit

* Morocco sees narrower 2014 deficit due to spending cuts

* North African kingdom introducing tough reforms

* Palace wary of reviving 2011 street protests

(Adds byline more budget details, taxation reform and background)

By Aziz El Yaakoubi

RABAT, Oct 18 (Reuters) - Morocco plans to cut spending next year to help reduce its budget deficit, the state news agency said, citing a draft of the budget, but targets only limited cuts in subsidies despite pressure from the IMF to do more.

The draft sets a 2014 budget deficit target of 4.9 percent of gross domestic product, down from an estimated 5.5 percent this year.

Morocco is under pressure from the International Monetary Fund and the World Bank to cut spending and reform subsidies, taxation and its pension system. The demands are linked to a two-year, $6.2 billion precautionary credit line agreed by the IMF in 2012 for the cash-strapped kingdom.

The government started to cut subsidies earlier this year by partially indexing energy prices to global prices, but the news agency said subsidies next year would still total 35 billion dirhams ($4.2 billion), down from 42 billion in 2013.

The government has said it will turn to hedging prices if oil prices go beyond $120 a barrel but the IMF is urging it to replace the current subsidy system by focusing aid to the country's poorest.

The draft budget forecast the economy would grow 4.2 percent next year, much higher than the planning agency's forecast of 2.5 percent.

The North African kingdom is struggling to fix public finances that were hit by the euro zone crisis, Arab Spring revolts and drought.

The royal palace, however, is reluctant to cut subsidies, fearing it could trigger more social unrest as cuts would hit the living standards of the majority of Moroccans used to subsidized oil, gas, sugar and wheat.

It does, however, plan tough reforms in the next year on taxation and pensions.

The draft budget showed that in a first step in tax reform, the government plans to expand the tax base by reforming value-added tax, but did not say how. It will also end a three-decade tax exemption for big agricultural businesses, the state news agency said.

Akhbar Alyawm daily, however, said only 400 farmers, which earn more than 35 million dirhams a year would be affected by the measure next year and would pay 15 percent company tax based on 2014 income, while other sectors pay 30 percent corporate tax.

Small and medium-sized farms will retain the exemption.

PUBLIC SECTOR JOBS

The government plans to spend 103 billion dirhams in wages, against 98 billion dirhams in 2013 and create 18,000 jobs in the public sector, down from 24,000 in 2013.

Moroccan governments tend to expand the public sector payroll to ease social pressures.

Morocco saw protests in 2011 demanding a full elected government as the Arab spring unfolded elsewhere in the Middle East.

Such protests have faded since King Mohamed allowed the Islamist Justice and Development party to lead the government after constitutional reforms gave more power to the elected government. But the king still retains the ultimate power.

Last September, when the government decided to raise energy prices, the opposition called for protests and described the decision as a dangerous step with unforeseeable consequences.

Last week, the king named new ministers from the centre-right RNI party to replace the former partner in the ruling Islamist-led coalition, which quit after disagreements partly over the sensitive reforms.

(Reporting by Aziz El-Yaakoubi; Editing by Patrick Markey/Stephen Nisbet/Susan Fenton)

((pat.markey@thomsonreuters.com)(+21620349006)(Reuters Messaging: pat.markey.thomsonreuters.com@reuters.net))

Keywords: MOROCCO ECONOMY/