TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe on Tuesday secured cabinet approval for a draft budget for the next fiscal year that aims to split the benefits of higher tax revenue between trimming fresh borrowing and stimulating the economy with record spending.
The government's second annual budget since Abe's election triumph a year ago marks a balancing act between boosting growth and doing just enough to show it is keen to rein in public debt, which is more than twice the size of the economy.
Of projected record spending of 95.88 trillion yen ($921.97 billion) in 2014/15, about one-third will be spent on social security while debt servicing costs will account for nearly one-quarter.
"Abe vows to seek both growth and fiscal consolidation, but the focus now needs be on stimulus," said Hidenori Suezawa, analyst at SMBC Nikko Securities. "Hasty fiscal tightening could derail the economy and foil the sales tax plan in 2015."
Spending in the general-account budget for the year starting April 2014 will rise more than 3 trillion yen from this year's initial budget, the Ministry of Finance said, with higher outlays for public works, military and social security.
Ministry officials played down the rise, however, saying it was inflated by technical factors such as the transfer on-budget of outlays from special accounts, and allocations from a planned April sales tax hike to shore up social security funding. Interest payments also rose while welfare costs increased as Japan's population ages.
Tax revenue is estimated at 50 trillion yen, rising 6.9 trillion yen from this year to a seven-year high, reflecting both expected economic growth of 1.4 percent and an increase in the sales tax to 8 percent from 5 percent that kicks in April.
New bond sales will be cut by 1.6 trillion yen from the current fiscal year to 41.25 trillion yen, a second consecutive decrease, but the government still relies on borrowing to cover 43 percent of its spending, down from 46.3 percent this year.
A "flexible fiscal policy" combining near-term stimulus with longer-run consolidation is part of Abe's economic recipe that also mixes in hefty monetary easing and pro-growth reforms.
Analysts expect budgets to stay loose for the time being to help the economy manage the planned two-step doubling of the sales tax to 10 percent, with the first increase due in April.
Earlier this month, the government approved 5.5 trillion yen in extra spending for the current fiscal year to cushion the first increase in the sales tax. The second part of the increase to 10 percent is penciled in for October 2015.
Some analysts worried about a lack of measures to help the world's third-largest economy sustain growth.
"We want to see more wise spending in areas with growth potential," said Naoki Iizuka, economist at Citigroup Global Markets Japan. "We cannot rely on public works forever."
The public works budget will rise to 5.96 trillion yen from this year's 5.28 trillion yen, including new bullet train lines, quake-proofing of infrastructure, and projects linked to the Tokyo 2020 Olympics.
Analysts and ministry officials say the government is making progress towards its goal of halving the primary budget deficit, which excludes new bond sales and debt servicing costs, by fiscal 2015/16.
The government estimates its primary budget deficit at 18 trillion yen in fiscal 2014/15, down 5.2 trillion yen from this year for the second biggest decrease on record.
Still, calculations by both analysts and the government suggest Tokyo would miss its goal of a primary surplus in 2020/21 without further tax increases and spending cuts.
"I'm less confident about achieving the fiscal 2020/21 goal than meeting the 2015/16," Finance Minister Taro Aso told reporters, saying that he would seek the way to clear the target while focusing on economic recovery.
Asked about determination to meet the fiscal goal, he said: "If you force me to choose between economic recovery and fiscal rebuilding, economic growth has higher priority. That's clear."
SMBC Nikko's Suezawa said social security spending must be streamlined in order to get runaway debt and spending under control to meet the 2020/21 target.
"The Abe administration, like the previous government, will struggle with cuts to welfare spending that could risk alienating the growing ranks of elderly voters," he said.
Social security outlays to cover healthcare and pensions for the fast-ageing population will top 30 trillion yen for the first time, up 1.4 trillion yen from this year and accounting for roughly a third of the budget.
Debt servicing costs - interest payments and redemptions - are expected to rise to 23.2 trillion yen, up 1 trillion yen from this year and the budget's second-biggest item.
Defence outlays amount to 4.78 trillion yen, up 2.2 percent on the year and marking the biggest increase in 18 years, amid simmering tensions between Japan and China over tiny islands that both claim in the East China Sea.
The International Monetary Fund estimates Japan's general budget deficit at 9.5 percent of GDP in calendar 2013, among the worst in the developed world, and narrowing to a still-elevated 6.8 percent in 2014. Public debt already exceeds 240 percent of GDP, by far the highest among major economies.
($1 = 103.9950 Japanese yen)
Editing by Tomasz Janowski, John Mair and Simon Cameron-Moore