* Far-left ally warns against more “tough austerity”
* Bigger reforms package to offset hit from capital controls
* Greek cabinet meets to discuss proposal (Updates with cabinet meeting, Syriza lawmaker)
By Renee Maltezou and Angeliki Koutantou
ATHENS, July 9 (Reuters) - Greek Prime Minister Alexis Tsipras raced on Thursday to shore up political support for a tough package of tax hikes and pension reforms due within hours if Athens is to win a new aid lifeline from creditors and avoid crashing out of the euro.
After readying the reforms with advisers, Tsipras met his cabinet to win their backing for a plan likely to include much tougher measures than those included in a previous proposal from creditors that was rejected by Greeks in a referendum on Sunday.
But having won wide public support at the referendum and the subsequent backing of opposition parties, an emboldened Tsipras is expected to have an easier time facing down any resistance at home, allowing him to focus on appeasing creditors.
The Greek daily Kathimerini said the package was worth 12 billion euros, bigger than a previous 8 billion euro plan because the economy - battered by two weeks of capital controls - was now expected to shrink 3 percent instead of growing 0.5 percent this year.
A government official, speaking on condition of anonymity, disputed the Kathimerini figure, saying the package was still a work in progress.
The offer must go far enough to satisfy sceptical creditors but may face resistance from the hard-left wing of Tsipras’ Syriza party and from his junior coalition partner, the Independent Greeks, after the government campaigned and won a resounding ‘No’ to more austerity in a referendum on July 5.
In a sign of the some of the upcoming challenges Tsipras will face, the leader of the far-left flank of his Syriza party came out to denounce any imposition of harsh measures on Greeks.
“We don’t want add to the past two failed bailouts a third bailout of tough austerity which will not give any prospects for the country,” Energy Minister Panagiotis Lafazanis told reporters. “Greece is not facing execution, it is not ready to accept any fait accompli.”
But Lafazanis also said it was clear Greece was looking to reach a deal soon with the institutions that will respect the “dignity” of people, leaving the door open for him to eventually back an agreement struck with creditors.
Other Syriza lawmakers said they would wait to be briefed on the proposals before deciding their positions.
“We have to wait and see. The deal must not include austerity measures, wage and pension cuts, must address the debt issue and include a growth package,” one far-left Syriza lawmaker said.
With banks shuttered and the economy grinding to a halt after two weeks of capital controls, Syriza rebels will have a tougher time making their case against any deal with creditors that paves the way for banks to open again.
Greece’s European partners want the reforms proposal on the table by Friday and Athens has promised to produce it on Thursday at the latest. If satisfied, the European leaders would endorse the package on Sunday, averting a potential Greek exit from Europe’s single currency.
Greece emerged last year from a deep recession that shrank its gross domestic product by a quarter over a six-year period, leaving a quarter of the workforce unemployed.
Athens wants creditors to lower budget surplus targets because of the economy slipping back into a recession this year but is not expected to outline its request for debt relief in the proposal being sent on Thursday.
Government sources said proposed tax hikes would include - an increase in corporate tax to 28 percent from 26 percent; a rise in VAT on luxury goods to 13 from 10 percent; a rise in VAT on processed foods, restaurants, transport and some health services offered by the private sector to 23 from 13 percent and a VAT hike on hotels to 13 percent from 6.5 percent.
Greek islands would continue to enjoy tax breaks that creditors had sought to scrap under the proposal - a nod to Tsipras’s right-wing coalition partner, which has made the issue one of its red lines. ($1 = 0.9003 euros) (Additional reporting by George Georgiopoulos and Michelle Kambas; Writing by Matt Robinson and Deepa Babington; Editing by Peter Graff and Giles Elgood)