By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's cabinet approved on Thursday a record $830 billion spending budget for fiscal 2017 that counts on low interest rates and a weak yen to limit borrowing, underscoring the challenge Tokyo faces in curbing the industrial world's heaviest debt burden.
The 97.5 trillion yen ($830 billion) general-account budget for the fiscal year starting on April 1 marks an increase of 733 billion yen from this year's initial plan due to a rising social security bill to fund the cost of services for a fast-ageing society.
The budgeted plan highlights a struggle Prime Minister Shinzo Abe faces in curbing spending, which is a key to his ambitious aim of achieving a primary budget surplus - excluding debt servicing and new bond sales - by the fiscal 2020.
"This budget does not mark a shift away from reflationary policies. Chances are high for Abe to compile additional stimulus budgets later next year," Toru Suehiro, senior market economist at Mizuho Securities, said.
Incoming U.S. President Donald Trump's reflationary policies should encourage Abe to follow suit, and calls for more fiscal stimulus will increase given the possibility that the premier may call a snap general election next year, Suehiro added.
Already, Koichi Hamada, a key advisor to the premier has called for more government spending to maximise the impact of monetary policy.
Finance Minister Taro Aso stressed that Abe will stick with reflationary policies with monetary easing and "flexible" fiscal spending.
"Abe cabinet is not pursuing austerity but we are aiming to balance (the budget) by expanding the economy," Aso told reporters.
The Ministry of Finance said this budget was aimed at reviving the economy and achieving fiscal consolidation. But analysts say a thorough spending reform is needed to restore public finances.
The government's plan to keep new bond issuance slightly below this year's initially-planned 34.43 trillion yen assumes rosy tax income estimate that counts on a weak yen to boost corporate profits, and greater investment return from foreign reserves.
When compiling an initial budget, the government tends to limit spending in a show of resolve to rein in snowballing debt, but it is prone to adopt extra budgets as the year progresses, budgetary tactics that loosen fiscal discipline, analysts say.
The fiscal slippage isn't helped by the Bank of Japan's aggressive monetary stimulus, which has pushed borrowing costs to a record low.
Since Abe took office four years ago, the government has compiled extra spending totaling more than 20 trillion yen.
Abe's cabinet endorsed on Thursday a third extra budget for this fiscal year, including additional issuance of deficit-covering bonds worth 1.75 trillion yen to offset lower-than-expected tax revenue due to the yen's gains earlier this year.
The extra budget has brought the amount of annual budget spending to 100.2 trillion yen for the current fiscal year, the highest in three years.
"If Japan adopts extra stimulus budget, that will cause more debt issuance," said Hidenori Suezawa, fiscal and markets analyst at SMBC Nikko Securities. "Given such possibility, I don't think fiscal discipline is at work with this budget."
($1 = 117.5400 yen)
(Additional reporting by Minami Funakoshi; Editing by Shri Navaratnam)