Japan's cabinet approved an 83.06 trillion yen ($728 billion) budget on Monday for the fiscal year from April, featuring an increase in social security spending as the population ages and a modest cut in new debt issuance.
The first budget under Prime Minister Yasuo Fukuda projected a 0.2 percent increase in spending in fiscal 2008/09 compared with this year, a retreat from fiscal reform efforts against the background of a possible snap election.
Pressure has been mounting from ruling Liberal Democratic Party lawmakers to boost government spending in order to win back support after the party took a drubbing in an upper house election in July.
Japan has had austere state budgets in the past few years as the government has sought to rein in public debt.
Even so, outstanding public debt is expected to rise to around 776 trillion yen by the end of next fiscal year, roughly 147 percent of gross domestic product -- the highest among leading industrialized countries.
The government's key fiscal consolidation target is to shift the primary balance -- revenue excluding debt issuance minus spending excluding debt service -- into surplus for both central
and local governments by the fiscal year starting in April 2011.
But the government's budget plan showed the primary deficit for the central government alone would widen for the first time in five years to around five trillion yen in fiscal 2008/09.
"We must keep the Japanese economy on a stable growth track," Finance Minister Fukushiro Nukaga told a news conference on Monday, brushing aside criticism that fiscal reforms were rolling back under the Fukuda administration.
Nukaga pointed to a downward revision in the government's economic growth forecast and the cloudy outlook for the U.S. economy because of the mortgage market crisis as reasons for the
need to support the domestic economy on the fiscal front.
Last week the Japanese government cut its growth forecast for the current fiscal year sharply to 1.3 percent from 2.1 percent, citing tumbling housing investment as the main culprit.
Negotiations between ministries over the past few days produced only minor changes to the draft budget, so the final version was largely the same as a blueprint compiled by the Ministry of Finance.
The budget is due to be submitted to parliament early next year. But with opposition parties holding a majority in the upper house, parliament may not approve the government's proposals
before the new fiscal year starts on April 1.
In that event, the government may be forced to run on a stop-gap budget for the first time in 14 years.
Even if the budget is approved by April, it could be revised to reflect demands from the opposition bloc, which would almost certainly involve an increase in spending, analysts say.
The government's draft budget showed general expenditure, covering everything from defense and public works to social welfare and education, would rise 0.7 percent from the current
fiscal year to 47.28 trillion yen because of an increase in social security payouts.
Social welfare, which accounts for 46 percent of general expenditure, will rise 3.0 percent as Japan's ageing population requires more spending on pensions and medical services.
The government is also increasing tax grants to municipal governments by 4.6 percent to 15.61 trillion yen to response to calls from lawmakers to reinvigorate regional economies.
However, the government managed to reduce new debt issuance by 0.3 percent to 25.34 trillion yen, largely thanks to an increase in non-tax revenue such as transfer of surplus funds in the foreign exchange special account to the general budget account.