BAGHDAD/ERBIL, Iraq (Reuters) -- Iraq's cabinet proposed on Sunday to slash the Kurdish share of the country's revenue in the 2018 federal budget, a move that Kurdish officials said was aimed to further punish them for a Sept. 25 referendum on independence.
If approved, the budget would further damage the relationship between Baghdad and Erbil -- the semi-autonomous region's capital -- already at boiling point after the central government launched a military offensive last month that swiftly recaptured the oil-rich city of Kirkuk.
A preliminary draft document seen by Reuters and confirmed by three lawmakers and two Iraqi government officials shows the Kurdistan region's share of the 2018 budget trimmed to 12.6 percent, down from the 17 percent the region has traditionally been entitled to since the fall of Saddam Hussein.
The 12.6 percent figure was "very accurate", said a government financial advisor on condition of anonymity, who said it was based on population data from the trade ministry's ration card program.
Iraq's central government and the Kurdish autonomous region have quarreled over money repeatedly since the 2003 fall of Saddam Hussein.
The post-Saddam constitution put in place a system guaranteeing the Kurds self-rule with a share of overall revenue proportionate to their share of the population.
For the past three years, Baghdad stopped sending funds while the Kurds held nearly all of northern Iraq's oil infrastructure and sold enough crude to fund themselves.
But the Iraqi government offensive that recaptured oil-producing territory from the Kurds last month means the autonomous region is once again dependent on Baghdad for funds. The central government has demanded a halt to all independent Kurdish oil sales.
The reduced budget would dramatically add to the Kurdistan Regional Government's (KRG) financial difficulties. The region says it is already stretched thin due to a three-year war on Islamic State and the cost of supporting hundreds of thousands of refugees who have fled the militants.
Last year, Iraq's parliament approved the 2017 budget, but all members of the KDP party that rules the Kurdish region stayed away, protesting that the budget failed to allocate enough money for salaries of state workers and Peshmerga fighters, the Kurdish region's security forces.
Another proposal inserted into the draft budget would see the central government distribute the Kurdish region's share of the federal budget to the three provinces that make up the region individually, further undermining the KRG's control over the allocation of funds.
"It's a dangerous sign which indicates that Baghdad is seeking to undermine the political and economic system in Kurdistan region by cutting the budget share and dealing directly with the provinces," said Ahmed Hama Rasheed, a Kurd and the secretary of the financial committee in the federal parliament.
"It seems that the central government is trying a divide and conquer policy with the Kurdistan region", said Rasheed.
Kurdish officials criticized the cabinet proposals, accusing Prime Minister Haider al-Abadi of using the 2018 budget to punish the Kurds, who overwhelmingly voted to break away from Iraq in the referendum, which Baghdad considers illegal.
In a press conference on Monday, Kurdish Prime Minister Nechirvan Barzani said Baghdad had violated the Iraqi constitution by drafting a budget that does not recognize Kurdish entitlements.
Barzani, the nephew of Massoud Barzani who stepped down last week as Kurdish president in the wake of the referendum crisis, said the KRG was "prepared to give them the oil revenue" -- apparently an offer to negotiate over its own sales of oil -- if the central government was prepared to give the Kurds their customary 17 percent share.
The budget proposal with the revised trimmed share for the Kurds was rejected by two Kurdish ministers attending Sunday's cabinet meeting, two Iraqi government officials confirmed.
The proposed 2018 federal budget must first be approved by Abadi and then referred to parliament which will vote on it.
The secretary general of the Iraqi cabinet, Mahdi al-Allaq, told Iraqiya state TV on Monday the cabinet had finished studying the draft budget and would refer it to the prime minister for final approval in the next cabinet session.
Editing by Peter Graff.