* Spending stays high, revenue falls sharply
* Budget deficit biggest on record
* Deficit, debt to fall gradually to not hurt recovery
* GDP seen shrinking 1.9 pct in 2009, 1.5 pct growth in 2010
(Adds details, comments from finmin interview)
By Gordon Bell
CAPE TOWN, Oct 27 (Reuters) - South Africa's government will keep spending to steer its way through its first recession in nearly two decades, but it defied political pressure by pledging on Tuesday to cut a record budget gap as the economy recovers.
The government and utilities will press on with massive infrastructure spending, while earmarking money for fighting poverty through welfare and for public works programmes and company incentives to help cut stubbornly high unemployment.
Investors are watching for signs of any departure from a previously conservative fiscal stance in Africa's biggest economy due to the growing prominence of more left-leaning leadership in the ruling ANC and its trade union allies, since Jacob Zuma became president this year.
Zuma is under pressure from new left-leaning cabinet ministers and unions to introduce anti-poverty measures and loosen fiscal policies that saw budget surpluses and small deficits during a decade of strong economic growth.
But analysts said the budget numbers showed prudence had won the day. The medium term budget statement put the 2009/10 deficit at 7.6 percent -- double a forecast from February -- but promised a fall to 6.2 percent of GDP in 2010/11 and 4.2 percent by 2012/13.
"They have secured their credibility with greater constraint in spending and some savings and efficiency measures," Peter Attard Montalto, emerging markets economist, at Nomura said.
The deficit jump was expected given lower tax revenue due to the recession and analysts had been watching for evidence the big shortfall would not stay for long.
Finance Minister Pravin Gordhan said spending would stay relatively high for now but vowed to avoid unsustainable debt. [ID:nLR310346] [ID:nLR092506]
"We will be diligent in the management of the public finances, and not burden future generations unduly," he told parliament in his first budget announcement since his appointment in May.
He told Reuters in an interview the Treasury wanted to cut the deficit faster, depending on economic conditions.
"What we have done is created a situation where there is no ambiguity about our intent and now we have got to see what the situation allows us to do," Gordhan said.
POVERTY
South Africa has seen some of the biggest popular protests in a year of global economic crisis, though, and Gordhan said the fight against poverty would be stepped up.
"We also recognise that vulnerability and poverty are deep-rooted, and these structural challenges require sustained, broad-based transformation of our economy, beyond the present recovery," Gordhan said.
The Treasury said the gap would ease gradually, with borrowing staying relatively high to help ensure a sustainable economic recovery from this year's forecast 1.9 percent contraction.
The Treasury said the government would retain a countercyclical fiscal policy, spending more when times were bad and reducing debt when they were good.
"Higher borrowing is, however, only a temporary solution," the Treasury said. "Over the medium term, the deficit will have to be reduced gradually."
SLUGGISH
The Treasury saw the economy emerging from recession in the fourth quarter of this year with signs that the hard-hit mining and manufacturing sectors may have turned the corner.
But recovery would be sluggish and uneven, with growth not seen bettering 2008's 3.1 percent before 2012, a slower rebound than in other countries. The economy was expected to grow 1.5 percent in 2010 and 2.7 percent in 2011.
Years of expansion had helped South Africa cut official unemployment to just over 20 percent but output has plunged in the last year and about half a million jobs have disappeared.
Relatively loose fiscal and monetary policy should support the recovery, although higher electricity costs and wages would keep pressure on inflation, with consumer inflation only seen in the 3 to 6 percent band, on average, in 2012, the Treasury said.
The target remains in place for now, despite fierce criticism from the ruling ANC's trade union and communist party allies, but the debate would escalate.
"At this stage, we see no reason to change the inflation target. We do want to signal, however, that the world over, there is a fair amount of debate, which we are monitoring," Gordhan said, adding talks would be held soon with the central bank.
The rand
Gordhan said the government would have liked to have intervened more to curb its rise, by boosting reserves, if that had been more affordable.
(Additional reporting by Stella Mapenzauswa and Wendell Roelf; Editing by Patrick Graham)