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UPDATE 2-Lebanese veterans block highways in budget protest

(Adds defense minister comment)

BEIRUT, June 27 (Reuters) - Hundreds of veterans burned tires and blocked highways in Lebanon on Thursday to protest a pension tax and benefit cuts in a 2019 budget intended to slash the country's deficit.

Parliament is debating the draft budget approved by the cabinet last month. It aims to cut the deficit to 7.6% of gross domestic product (GDP) from 11.5% last year, as Lebanese leaders warn the country faces financial crisis if there is no reform.

Lebanon's public debt is 150% of GDP, among the largest in the world. State finances are strained by a bloated public sector, high debt-servicing costs and subsidies for power.

Fears of cuts in public-sector pay and pensions sparked protests as the budget was being drawn up earlier this year. The draft approved by cabinet omitted a proposed temporary public-sector pay cut.

Still, army veterans object to plans that will affect them in the draft budget, including a 3% cut in their pensions to help support health care and social services, a pension tax and a freeze on early retirement.

In a reminder of the hurdles facing Prime Minister Saad al-Hariri's government, plumes of smoke rose early on Thursday as veterans blocked highways for several hours with burning tires. Long lines of cars queued on the highway south of Beirut and other parts of the country.

The veterans waved Lebanese flags and held photos of soldiers who died in service, whose families will also be affected.

"The political class pushed us to this," said Abbas Ammar, a first sergeant who retired in 2001. "All our lives we preserved the security of our country. These are our rights that we earned."

Defense Minister Elias Bou Saab said lawmakers would find solutions for the provisions troubling army retirees. "Shutting down roads does not benefit the demands (of protesters) and the citizen pays the price," he said.

But some drivers stuck in the traffic sympathized with the protesters. "I have to get work, of course, but this cause is much bigger than that, because we're also not happy at all with what this government is doing," said Mohamad Shebli, sitting in his car.

The main steps to cut the deficit include an increase in tax paid on interest, an import tax and a government plan to issue low-interest treasury bonds to cut debt-servicing costs.

The central bank governor told Reuters this week he backs government efforts to cut those costs, but an agreement has yet to be reached on how. Discussions would be held once the budget is approved, he said. (Reporting by Ellen Francis and Alaa Kanaan in Beirut; editing by Larry King)