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* First reversal of major austerity policy since crisis began
* Decision may win public support for controversial reforms
* Restoring public perks could be worth 50-80 billion riyals
* Tax rises, fuel price hikes in coming months will offset that
* But non-oil sector growth likely to benefit this year
* Graphic of Saudi's slump bit.ly/2oyVauR
By Andrew Torchia
DUBAI, April 23 (Reuters) - The decision by Saudi Arabia's King Salman to restore cuts to financial allowances for civil servants and military personnel is being seen as helping the kingdom avoid recession this year while smoothing the path toward economic reforms.
Last September, the government sharply reduced financial perks for employees in the public sector, where most Saudis work, in one of its most drastic steps yet to curb a huge budget deficit caused by low oil prices.
On Saturday, Riyadh cancelled that step -- the first time it has reversed a major austerity policy since its budget crisis erupted two years ago. This followed widespread grumbling about stagnant living standards among ordinary Saudis.
Such perks include housing, vacation, and sickness allowances plus monthly bonuses for some state and military workers.
Analysts say the decision does not necessarily signal change in Riyadh's determination to eliminate its deficit. Instead, it may be a tactical move designed to help authorities implement a controversial economic reform programme announced last year by Deputy Crown Prince Mohammed bin Salman.
That programme includes steps such as new taxes, domestic fuel price hikes, the transfer of much of the burden of development projects to the private sector from the government, and the sale of a stake in national oil giant Saudi Aramco.
By showing it is sensitive to the public welfare and is looking for ways to share the financial benefits of reforms with society, the government may now be able to push ahead with its programme.
"The government was forced to take extreme measures last year. Now they are more at ease with the fiscal situation so they are able to give something back to society," said John Sfakianakis, director of the Gulf Research Centre in Riyadh.
"They aim to continue the reforms, and they want to do it with society's support."
Analysts have estimated that restoring the financial perks would put around 50 billion to 80 billion riyals ($13.3 billion to $21.3 billion) annually in consumers' pockets.
Finance Minister Mohammed al-Jadaan told Al Arabiya television that payments would start by the end of May, just before the holy month of Ramadan, when Saudis traditionally splurge on holiday items and travel.
Deputy Economy Minister Mohammed al-Tuwaijri said restoring the allowances was possible because Riyadh had made faster-than-expected progress in cutting its deficit.
The gap was 26 billion riyals in the first quarter of 2017, well below the government's projection of 54 billion riyals, he said. Riyadh has forecast a deficit of 198 billion riyals in 2017 and aims to eliminate the gap by 2020.
However, the boost to consumer spending from the restored public will eventually be offset by new austerity measures. A tax on tobacco and sugary drinks will be introduced in coming weeks, raising up to 10 billion riyals annually.
Officials also aim to hike domestic fuel and water prices in coming months, raising an additional 29 billion riyals. And a 5 percent value-added tax on most products is to be imposed at the start of 2018.
Nevertheless, Sfakianakis estimated restoring the public perks would add half a percentage point to the non-oil economy this year, bringing its growth to around 1 percent.
That could be enough for Saudi Arabia to avoid recession -- an important achievement for the economic reformers. A Reuters poll of analysts this month found them forecasting median Saudi gross domestic product growth of just 0.5 percent in 2017.
A 1.4 percent rise in the Saudi stock index on Sunday, led by retailing companies, showed investors expect a boost to consumer spending.
Authorities also signalled on Saturday that they intended to move ahead with a part of the reform programme that is popular among many ordinary Saudis: reducing corruption and making the government more transparent.
A royal decree dismissed the kingdom's information and civil service ministers and set up a committee to investigate allegations of abuse of the civil service office. The decree did not describe any specific allegations of wrongdoing.
Additional reporting by Marwa Rashad Editing by Jeremy Gaunt.