UPDATE 1-Portugal budget plan cuts investment, caps wages

* Draft plan calls for deficit cut to 2.8 pct/GDP in 2013

* Programme still to be considered by parliament, Brussels

(Adds Finance Minister, analysts, details on approval)

By Sergio Goncalves and Shrikesh Laxmidas

LISBON, March 8 (Reuters) - Portugal plans to cut its budget deficit to below the EU's 3-percent limit by 2013 by reducing investment and capping public sector wage growth, although it will also rely on the economy recovering from this year.

The plan, which Portugal has to submit to Brussels, projects a fall in the deficit to 2.8 percent of gross domestic product in 2013 from 8.3 percent this year and also raises taxes on high incomes and stock market gains, according to a draft document.

The Socialist government's austerity plan, whose growth forecast for 2011 is broadly in line with latest published projections by the European Commission, is seen as key to convince markets Portugal will tackle rising deficits and debt. That in turn is vital as investors assess whether the country may be next in line to run into Greece-style fiscal problems.

According to the draft guidelines of the stability and growth pact update for 2010-2013, the budget gap will fall to 6.6 percent next year and then to 4.7 percent in 2012 before it meets the EU target of below 3 percent the following year.

"This is a bet on reducing the weight of the state in the economy and the weight of public spending," Finance Minister Fernandio Teixeira dos Santos said. "The challenge that we have ahead concerns all of us ... and it is important that we have the broadest possible political support for it," he said.

The government was discussing the plan with opposition parties, unions and business leaders on Monday and plans to hold a parliament debate on March 25 before submitting the strategy to Brussels before the end of the month.

The programme does not require a parliament vote, but if the minority government decides to submit it for a house vote, this may simplify the strategy's approval if main opposition parties commit themselves to accept bills making part of the plan.

Spending cuts will account for 49 to 50 percent of the planned deficit reduction, while revenue measures will do 15 to 16 percent of the narrowing, the draft said. The government expects economic growth to provide the rest of the adjustment.

GROWTH SEEN REALISTIC

The plan envisages that the economy, which contracted 2.7 percent last year in the country's worst recession in decades, should grow 0.7 percent this year and 0.9 percent in 2011 -- versus European Commission forecasts last November of 0.3 percent and 1.0 percent respectively. The Portuguese plan then foresees growth of 1.3 percent in 2012 and 1.7 percent in 2013.

While some economists like Paula Carvalho of BPI bank in Lisbon said the plan "can be seen as too dependent on growth" meaning more measures may be required if the expansion fails to materialise, others said the growth forecasts were feasible.

"We think that the assumptions for growth are more or less realistic. That is in positive contrast to the stability and growth programme in Spain, which projects growth of around 3 percent in 2012 and 2013," said Ralph Solveen, an economist at Commerzbank in Frankfurt.

"We still have to see what kind of support the plan gets in parliament, but after a deal the government had with the main opposition party on the 2009 budget it is reasonable to believe that support can be achieved," he added.

On Friday, parliament will vote this year's budget bill, which includes a freeze on public sector wages. The Social Democrats, the main opposition party, have pledged to abstain, which should allow the ruling Socialists to pass it.

Under the long-term plan, the government will not raise public sector wages by more than inflation until 2013 and will extend the existing rule of hiring just one civil servant for every two leaving the service, as it aims to cut personnel spending to 10 pct of GDP by 2013 from last year's 11.5 percent.

Main unions have already said they plan strikes and protests if the government does not reverse real wages declines.

The austerity plan only encompasses tax hikes for annual incomes above 150,000 euros, where the tax rate will be increased to 45 percent. The maximum rate now is 42 percent.

Although some economists dismissed the top tax rate as symbolic, political analysts say such measures can appease the workers and help to prevent major strikes.

A maximum limit on tax deductions will be imposed for taxpayers with higher incomes, and higher pensions will also enjoy fewer tax breaks.

Public debt is expected to peak in 2012 at 90.1 percent of GDP, up from 85.4 percent forecast for this year, before retreating to 89.3 percent in 2013.

The government expects to raise 6 billion euros over the period via the sell-off of state-owned stakes in companies and privatisations, including 1.2 billion euros in 2010.

The share of public investment will fall to 2.9 percent of GDP in 2013 from 4.9 percent last year and investment in the defence sector will be slashed by 40 percent. It said it would postpone construction of high-speed train links between Lisbon, Porto and Spain's Vigo.

Social spending will be cut by 0.4 percentage points of GDP over the period thanks to a ceiling on transfers to Social Security. It will also seek savings worth 0.3 to 0.4 percentage points of GDP on healthcare. (Writing by Andrei Khalip; editing by Patrick Graham and Stephen Nisbet)