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UPDATE 1-NZ budget deficit halves, but still misses forecast

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* NZ's 2011/12 budget deficit halves from year earlier

* Deficit still wider than govt budget forecast

* NZ FinMin says spending and debt under control

WELLINGTON, Oct 10 (Reuters) - New Zealand's budget deficithalved in the 2011/12 fiscal year but the improvement was stillless than expected, underscoring the government's challenge ofreturning to surplus in three years given a patchy recovery anduncertain global outlook.

The operating balance excluding gains and losses (OBEGAL),which strips out unrealised investment gains or losses, for the12 months to June 30 was a deficit of NZ$9.2 billion ($7.5billion), or 4.5 percent of GDP.

That was bigger than the government's budget forecast of 4.1percent, but was down sharply from a deficit of NZ$18.4 billionin 2010/11, which equated to 9.3 percent of GDP.

"The government is making good progress, with the economycontinuing to recover and public finances improving," FinanceMinister Bill English, who is overseas, said in a statement.

His statement made no specific mention of the government'splan to return the budget to surplus by 2014/15, but did sayspending cuts were needed to achieve a surplus.

"We have less control over our revenue, particularly withother parts of the world still struggling with high levels ofdebt and sluggish economies," English said.

"This will have an impact on New Zealand."

($1=NZ$1.22)

(Reporting by Gyles Beckford and Mantik Kusjanto; Editing byJohn Mair)

((Wellington newsroom tel +64 4 802 7980, fax +64 4 473 6212wellington.newsroom@reuters.com))

Keywords: NEWZEALAND ECONOMY/