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 deficit halved in the 2011/12 fiscal year but the improvement was still less than expected, underscoring the government's challenge of returning to surplus in three years given a patchy recovery and uncertain global outlook.

The operating balance excluding gains and losses (OBEGAL), which strips out unrealised investment gains or losses, for the 12 months to June 30 was a deficit of NZ$9.2 billion ($7.5 billion), or 4.5 percent of GDP.

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

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

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

"We have less control over our revenue, particularly with other parts of the world still struggling with high levels of debt 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 by John Mair)

((Wellington newsroom tel [phone], fax [phone] [e-mail]))

Keywords: NEWZEALAND ECONOMY/