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UPDATE 2-Turkey may roll back unpopular tax increase earlier than planned

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ANKARA, Oct 16 (Reuters) - Turkey may roll back a temporary increase in corporate tax earlier than planned, Finance Minister Naci Agbal said on Monday, the latest backtracking government retreat from deeply unpopular tax hikes to fund military spending.

President Tayyip Erdogan's ruling AK Party has announced tax increases to help pay for 18 billion lira ($5 billion) in additional military spending next year.

But the moves - which initially proposed increasing the tax on motor vehicles to 40 percent - have been unpopular, and sparked a backlash on social media. The AK Party, though dominant, is also keen to retain support ahead of 2019 elections.

On Friday, a parliamentary commission proposed a more modest increase to 15-25 percent for most cars, depending on their engine size. The government will also drop plans to increase some income taxes to 30 percent from 27 percent.

Corporate tax will be increased to 22 percent from 20 percent during the next three years. However, Agbal said that increase may not need to run for the full three years.

"If our financial means allow, we can withdraw the three-year, 2 percentage point increase earlier than planned," he told a news conference to announce next year's budget.

The government says the additional defence spending is urgently needed to modernise the military, the second-largest in the NATO alliance, and meet the costs of domestic and foreign security operations.

Turkey is fighting a three-decade insurgency against Kurdish militants in its largely Kurdish southeast. It has also sent a convoy of military vehicles into Syria's Idlib province, a deployment that appears to be partly aimed at containing a Kurdish militia across its borders.

FOCUS ON GROWTH

Agbal said the government would to pursue policies that support growth to meet its target of 5.5 percent annual economic expansion between now and 2020.

"Public finances have shown an expansionary outlook since 2014... and they will continue to support growth in the 2018-2020 period," he said.

The government has been on a push to boost bank lending and bolster growth ahead of the 2019 elections. The economy contracted in the third quarter of last year - when the country was shaken by a failed coup - but has since recovered, with output expanding by 5.1 percent in the third quarter of this year.

Much of the stimulus has come in the form of the government's Credit Guarantee Fund, which guarantees loans to small and medium-sized enterprises that could not otherwise get credit. The fund has so far backed loans worth 219 billion lira, Agbal said.

He said the budget deficit was seen at 65.9 billion lira ($18.10 billion) in 2018, wider than this year's expected deficit of 61.7 billion lira.

The budget deficit-to-GDP ratio will be around 2 percent by the end of this year, having doubled from 1 percent in 2016, mainly on the back of government's incentives, campaigns and higher security expenses, he said.

The aim is to bring that down to 1.9 percent in 2018 and 2019, and then to 1.6 percent in 2020, he said ($1 = 3.6387 liras) (Reporting by Nevzat Devranoglu Writing by Ece Toksabay; Editing by David Dolan/Jeremy Gaunt)