The government adopted during an extraordinary Cabinet meeting Wednesday a fiscal 2015 general account draft budget worth a record ¥96.34 trillion (S$1.093 trillion), up 0.5 per cent from the fiscal 2014 initial budget.
The record-high draft budget reflects an increase in spending on social security, such as medical care and pensions.
Meanwhile, tax revenues are expected to hit the highest level in 24 years - since fiscal 1991, in the midst of bubble economy - thanks to recovery in business performance mainly among large companies.
The government will keep new government bond issuance below ¥40 trillion for the first time in six years. The economic recovery enabled the government to reduce new government bond issuance, but prospects for the government's efforts to reconstruct public finances are uncertain.
"The budget is conducive to goals of revitalizing the economy and restoring fiscal health at the same time," Prime Minister Shinzo Abe told reporters Wednesday morning. "We want to spread the effects of economic recovery across the country."
On the expenditure front, the government will earmark ¥72.89 trillion in spending on policy measures, up 0.4 per cent from the fiscal 2014 initial budget.
Social security spending, which accounts for about 40 per cent of total policy-related spending, amounts to ¥31.53 trillion, up 3.3 per cent.
Defence spending will increase for a third year in a row to ¥4.98 trillion to strengthen coastal monitoring and defence of remote islands. Spending on public works projects will be ¥5.97 trillion, which is almost at the same level compared with that in the fiscal 2014 initial budget.
Tax allocations to local governments will fall below ¥16 trillion for the first time in seven years, to ¥15.54 trillion, because local governments' tax revenues are expected to recover to top ¥40 trillion.
The general account draft budget for fiscal 2015, which starts in April, increased only 0.5 per cent from the fiscal 2014 initial budget, largely due to the decrease in tax allocations to local governments.
Tax revenues are projected to increase by 9 per cent to ¥54.53 trillion because income and corporate tax revenues are expected to rise substantially. Consumption tax revenue also will increase as the tax rate was raised from 5 per cent to 8 per cent in April last year.
New government bond issuance will amount to ¥36.86 trillion, falling below the level in the previous fiscal year's initial budget for five years in a row. The rate of reliance on government bonds, which was 43 per cent, will improve to 38.3 per cent. It is the first time in six years that this rate has fallen below 40 per cent.
As a result, the primary balance, which indicates the amount that the government can procure for policy measures without acquiring debt, is expected to improve. A deficit in the primary balance is expected to drop by more than ¥4 trillion from the fiscal 2014 initial budget to ¥13.41 trillion.
The government is expected to reach its goal of reducing the ratio of the deficit to gross domestic product, with local government deficits included, to half the fiscal 2010 level in fiscal 2015.
The government plans to submit the fiscal 2015 draft budget to the ordinary Diet session, which is scheduled to be convened on Jan. 26, and aims to have it pass the Diet before the unified local elections to be held on April 12.