TOKYO, Dec 16 (Reuters) - Japan's government plans an initial budget of a record 97.7 trillion yen ($872 billion) for the 2018/19 fiscal year, while keeping new debt issuance below this year's level thanks to hefty tax revenue as the economy picks up, government sources told Reuters.
The planned budget spending for the year beginning April 1 marks an increase from this year's 97.5 trillion yen, the sources said on condition of anonymity as the plan has not yet been finalised.
Prime Minister Shinzo Abe's cabinet is expected to approve the budget draft on Dec. 22, along with an extra budget for the current year.
The budget underscores the difficulty Japan has in curbing spending - despite the heaviest debt burden in the industrial world - as an ageing population pushes up welfare costs, and regional tensions related to North Korea mean rising military spending.
It all means a test of Abe's will to restore fiscal health and revive the world's third-largest economy at the same time, while he is seen favouring growth over austerity.
Tax income for the 2018/19 fiscal year is estimated at 59.1 trillion yen, the highest since 1991 during the asset bubble era.
Hefty tax revenue allows for reductions in new bond issuance to 33.7 trillion yen, down from 34.4 trillion yen planned this year. That would mark eighth straight year of reductions.
To limit new bond issuance, the government will tap non-tax revenue of 4.9 trillion yen, down from this fiscal year's 5.4 trillion yen, the sources said.
The government is set to trim debt-servicing costs to 23.3 trillion yen, from this year's 23.5 trillion yen, due to the Bank of Japan's negative interest rate policy, they added.
($1 = 112.1000 yen) (Writing by Tetsushi Kajimoto; Editing by Ian Geoghegan)