WELLINGTON, July 3 (Reuters) - The New Zealand government's fiscal position was better than forecast in May mainly due to improved returns from investment funds, although the prolonged recession saw the accounts remain deeply in deficit.

The operating balance for the 11 months to May 31 was a deficit of NZ$7.16 billion ($4.5 billion), or 14 percent better than the forecast made in May's budget of a deficit of NZ$8.33 billion, the Treasury reported on Friday.

It said the improved deficit was largely because of net gains of around NZ$1 billion from various state investment funds, which offset losses in the value of some financial instruments held by the central bank.

It said overall tax revenue was on forecast, but the company tax take was down around NZ$400 million because of the recession.

The operating balance excluding gains and losses (OBEGAL), which strips out unrealised investment gains or losses, was a deficit of NZ$1.21 billion, NZ$432 million lower than forecast because of lower than expected government spending.

Net government debt stood at NZ$15.69 billion, which was NZ$547 million higher than forecast, equating to 8.7 percent of gross domestic product, against a forecast 8.4 percent.

The government's net cash position, the difference between all income and spending -- operational and capital -- was a deficit of NZ$7.13 billion compared with a forecast deficit of NZ$8.18 billion.

The Treasury forecast in the 2009/10 budget an overall operating deficit of NZ$9.3 billion for the fiscal year to June 30, with an OBEGAL deficit of NZ$2.92 billion, and net cash shortfall of NZ$8.46 billion.

It also forecast large budget deficits for much of the next 10 years and increased borrowing to cover the shortfalls. The government's net debt was forecast to peak at around 40 percent of gross domestic product in 2016/17. See

However, ratings agency Standard and Poor's, which had previously warned of a downgrade on the deteriorating outlook, said the budget strategy of heading back to surpluses and maintaining low debt justified an upgrade of the outlook to stable from negative.

($1=NZ$1.59)

((Wellington newsroom tel +64 4 471-4234, fax +64 4 473-6212, wellington.newsroom@reuters.com)) Keywords: NEWZEALAND ECONOMY/FISCAL

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