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UPDATE 2-Zimbabwe's 2016 budget deficit hits worse than forecast $1.4 bln

* 2016 budget deficit hits $1.4 billion, 10 percent of GDP

* Chinamasa says $134 million paid to white former farmers

* State firms and farmers' subsidies contribute to deficit (Adds compensation to farmers, farmers union)

HARARE, July 20 (Reuters) - Zimbabwe's budget deficit rose to $1.4 billion, or 10 percent of national output, in 2016, worse than previously revised estimates, the country's finance minister said.

The shortfall arose from unbudgeted subsidies to farmers, food imports following a devastating drought, compensation to white former farmers and support for loss-making state-owned firms, Patrick Chinamasa told parliament on Thursday.

The increase far exceeded an initial projection of $150 million, Chinamasa said. In his annual budget address last December, he said the deficit had risen to $1.18 billion.

Chinamasa said the government paid white former farmers $134 million last year as compensation for land seized by President Robert Mugabe's government since 2000. The amount had not been set aside in the initial budget.

The IMF has said compensating the farmers is among the requirements for Zimbabwe to access new foreign funding.

Ben Gilpin, acting director at Commercial Farmers Union of Zimbabwe, a grouping of less than 200 members from 4,500 at the start of Mugabe's land seizure drive in 2000, said he was not aware of who had been compensated by the government.

"We haven't seen or heard of those payments from people whom we have been in contact with. We would need to check where those payments have gone," Gilpin told Reuters.

OUTLOOK POSITIVE

Chinamasa said the government had initially set aside $66 million to finance farmers last year but ended up spending $615 million. Most of the money was borrowed from domestic banks and the central bank, he said.

This year's deficit, previously forecast at $400 million, is also expected to increase by nearly $120 million due to a maize subsidy, Reuters calculations show - a scheme that Mugabe's critics say will be open to abuse and saddle a troubled economy with more debt.

Chinamasa reiterated that a rebound in agriculture would propel growth of 3.7 percent in 2017. Revenues, at $3.7 billion, are expected to be in line with official forecasts.

"The outlook for 2017 is very positive," he said in a half-year budget review statement to parliament.

The IMF has urged Zimbabwe to slash public sector wages, now at more than 90 percent of the national budget, reduce farm subsidies and improve transparency in the mining sector, reforms that can win the country new funding from foreign lenders. (Reporting by MacDonald Dzirutwe; editing by Mark Heinrich and Alexander Smith)