Bulgaria drops health tax hike after criticism

* Sofia reverses plan to raise health tax after criticism

* Civil servants to pay contributions for first time instead

* Slow pace of reform to hamper recovery, economists warn

SOFIA, March 15 (Reuters) - The Bulgarian government has dropped plans announced five days ago to increase health taxes for the ailing healthcare system in another policy reversal as it struggles to balance its budget.

The move follows criticism from industrial organisations and rightist allies of the GERB government who said the tax rise would not help the healthcare service but only suffocate business in the recession.

Instead, 150,000 civil servants including the army and the police will have to pay social security contributions for the first time, raising about 150 million levs ($105.5 million), Finance minister Simeou Djankov said.

"There must be justice. It is not right to have some people who pay and others who do not," Djankov said.

Bulgarian civil servants have been exempt from social security contributions in exchange for forfeiting the right to strike or take a second job. They will not get the right to strike now in exchange for paying contributions.

Paying the health tax will cut civil servants' salaries by 12 percent. The police have threatened nationwide protests in the next few days.

Bulgaria's government which took office last July, has struggled to balance its budget by cutting spending rather than seeking loans.

Last Wednesday, striking general practitioners in all major cities of the European Union country said they would go back to work when they were paid, prompting the government to raise health tax contributions by 2 percent to 10 percent of income, effective from April.

The general tax rise would have raised 300 million levs ($208 million).

Under pressure from protesting doctors, the cabinet of the centre-right GERB party decided last week to spend an additional 300 million levs on healthcare by increasing health payments to 10 from 8 percent of an individual's income.

The health tax reversal was not the first recent instance of the government caving in to public pressure.

Last month, the government postponed an overhaul of the health system which would have included the closure of hospitals and an increase in the pension age.

A Greek-style crisis in Bulgaria is unlikely, analysts say, but a lull in reforms and the cabinet's populist tendencies will mean more pain and a slower recovery. (Reporting by Tsvetelia Tsolova; Editing by Jackie Cowhig)