* Revenue, spending increased in 2013 budget
* Nigeria ups oil output projection despite recent decline
* Budget deficit to fall to 1.85 pct of GDP (Adds details, background quotes, splits dateline)
By Camillus Eboh and Tim Cocks
ABUJA/LAGOS, March 7 (Reuters) - Nigeria's budget deficit is set to fall to 1.85 percent of gross domestic product in 2013, the budget office said on Thursday, as government opted to save less of its oil revenue.
A finance ministry document circulated after his remarks put last year's budget deficit at 2.85 percent of GDP.
Nigerian President Goodluck Jonathan approved a 4.99 trillion naira ($31.6 billion) budget last month for 2013, after it was passed by parliament, ending two months of disputes over the spending plans.
It was an increase on last year's 4.7 trillion naira budget.
"There's has been a trending downwards of the fiscal deficit," Budget Office Director General Bright Okogwu told journalists in the capital Abuja.
"We have a deficit of about 1.85 percent of GDP. I think this is very good going."
Africa's second biggest economy and top oil producer is growing as an investment destination, as fiscal stability improves, its currency stablises and economic growth remains high. But investors are wary of a long established tendency to mismanage oil revenues, mostly because of endemic corruption.
Nigeria's revenues from oil production usually exceed spending and the surplus is deposited into the Excess Crude Account (ECA), which means the deficit is artificial - it can usually be financed from the country's own savings.
The balance in the ECA has been increasing over the past year which suggests Nigeria is saving more of its oil windfall, a key objective of finance minister Ngozi Okonjo-Iweala.
The document released by the ministry showed total revenue collected by the federal government is projected to increase to 4.1 trillion naira, from 3.56 trillion naira in 2012.
But that projected increased was partly a function of a higher benchmark oil price assumption -- $79-per-barrel, compared with $72 in the 2012 budget. It was also owing to a projected increase in oil production to 2.53 million barrels per day, compared with 2.48 million bpd in 2012.
Oil industry experts think the figure may be too optimistic -- national statistics bureau figures show oil production averaged around 2.34 million bpd last year.
Analysts said the shrinking of the deficit from an earlier estimate of 2.17 percent may paradoxically be because parliament inflated spending by raising the benchmark oil price assumption from the original $75-per-barrel, boosting revenue projections.
Money earned from oil over and above the benchmark price is automatically deposited into the ECA, so a higher price means more money freed up to cover spending, which reduces the nominal deficit but in reality lowers oil savings.
When Jonathan presented the budget late last year the national assembly passed it but increased spending. Members wanted more spending for projects and their constituencies.
In the end, the administration backed down: spending rose to 4.99 trillion naira from the 4.92 trillion proposed by Jonathan's team, funded by an increase in the benchmark price.
"It all depends on what the reason are behind the fall in the deficit," said Razia Khan, Head of Africa Research at Standard Chartered Bank.
"If it's due to that increase in the benchmark price, which increased spending levels, then it's not necessarily good news because it means Nigeria is actually saving less oil money."
She added that oil output assumptions in Nigeria were "becoming increasingly optimistic over time."
But she added that lower borrowing costs because of falling sovereign bond yields may also have contributed.
The document also showed the portion taken up by recurrent expenditure fell slightly to 2.39 trillion naira, from 2.47 trillion naira -- Okonjo-Iweala has made it a central aim to slash Nigeria's high recurrent expenditure and increase badly needed investment in infrastructure.
The budget assumes GDP growth of 6.5 percent in 2013 and inflation of 9.5 percent. ($1 = 158.0500 naira) (Writing by Tim Cocks; Editing by Joe Brock, Ron Askew)