DUBAIDUBAI Aug 2 (Reuters) - Bahrain's government has rejected parliament's proposals to reform allowances paid to Bahrainis squeezed by years of austerity on the grounds that they would break government spending caps, lawmakers said.
After oil prices fell in 2014, pressuring state finances, Bahrain cut subsidies and raised taxes and fees to control its deficit. But the austerity has angered some Bahrainis and prompted a backlash in parliament.
Bahrain, which lacks the ample oil reserves of fellow Gulf states, has held off on fresh austerity measures, such as the introduction of value-added tax, until parliament agrees on a new system to compensate low- and middle-income citizens for increases in the cost of living.
The proposal submitted by parliament would have required an increase in government spending at a time when Bahrain is struggling with a current account gap and a large deficit, which have dragged down prices of its bonds and weighed on the dinar.
"The government has indeed asked us to review our proposal," Jamal Fakhrou, the head of parliament's technical commission in charge of the reform, told Reuters.
He said the government had explained it did not plan to raise direct cash allocations for subsidies in the next two years above the 382 million dinars ($1.01 billion) budgeted for 2018.
Another member of the House of Representatives, who declined to be named, said government officials were concerned that the proposal did not take into account a growing population, which would mean the cost of the programme would rise in future years.
The new subsidies proposal, published by parliament earlier this month, recommends including meat subsidies and a cost of living allowance in a single package and increasing the size of that package for both working and retired Bahrainis.
It would provide 150 dinars for Bahrainis earning less than 300 dinars a month -- up from 100 dinars in the old system -- 100 dinars for those earning up to 700, and 75 dinars for those earning up to 1,000, officials said.
The proposal also included an additional allowance of 50 dinars for citizens earning between 1,001 and 1,200 dinars.
Some lawmakers said it could be difficult to reach agreement on a revised system that would satisfy both sides.
"One side will have to give concessions because the ultimate goal is to serve the citizens," Fakhrou said.
Bahrain's government did not respond to a Reuters request for comment.
Even if agreement is reached, the changes could still be met with public anger as the country's main opposition groups are not represented in parliament.
A senior International Monetary Fund official said in May that Bahrain must urgently reform its finances to cut a large state budget deficit and support its currency.
Fiscal steps already announced by the government would cut the deficit to 11 percent of gross domestic product in 2018 from 14 percent last year, Bikas Joshi, who led an IMF mission to Manama, said.
Western-allied Bahrain, where a Sunni Muslim royal family rules over a Shi'ite-majority popluation, has seen unrest in recent years.
Main opposition groups, including al-Wefaq, boycotted the last parliamentary elections held in 2014 to protest what they described as an unfair electoral system.
Courts in Bahrain last year dissolved al-Wefaq and other opposition groups, accusing them of helping foster violence and terrorism. In May, parliament approved a bill barring members of the dissolved groups from running in elections. ($1 = 0.3777 Bahraini dinars) (Reporting by Aziz El Yaakoubi; Editing by Adrian Croft)