Japan readies record $800 bln 2015-16 budget, curbs bond sales - sources

By Takaya Yamaguchi

TOKYO (Reuters) - Japan's government will propose a record budget for next fiscal year of more than $800 billion but cut borrowing for a third year, government officials said on Sunday, as Prime Minister Shinzo Abe seeks to maintain growth while curbing the heaviest debt burden in the industrial world.

The third annual budget since Abe swept to power in late 2012 also highlights his struggle to contain bulging welfare costs for the fast-ageing society while increasing discretionary spending in areas such as the military.

Abe's 96.3 trillion yen ($813 billion) draft budget for the year from April, to be approved by the Cabinet on Wednesday and submitted to an upcoming session of Parliament, is up from this fiscal year's initial 95.9 trillion, the two officials told Reuters.

But spending restraint and a surge in tax revenues as the economy recovers allows the government to cut bond issuance by 4.4 trillion yen to 36.9 trillion, the third decrease in a row and the lowest level in six years, the officials said.

The improved fiscal picture helps Abe trim Japan's public debt, which is well over twice the country's GDP after years of sluggish growth and huge stimulus spending. The budget for the coming year follows an extra budget of 3.1 trillion yen for this fiscal year, approved last week.

With the budget deficit - excluding new bond sales and debt servicing - projected at roughly 3 percent of gross domestic product for the 2015-16 fiscal year, Abe will meet the government's promise of halving the debt ratio from 2010-11 levels.

But Finance Ministry calculations show that the goal of balancing the budget by 2020-21 remains ambitious. [ID:nL4N0PX32J]

Abe raised the national sales tax in April to 8 percent from 5 percent, sending the world's third-biggest economy into recession. He postponed a second increase, to 10 percent, by 18 months to April 2017, but the economy's upturn under the premier's easy-money policies is set to boost tax revenues in the coming year.

The draft budget projects tax revenues rising 4.5 trillion yen to 54.5 trillion yen, the officials said, easing somewhat the need to issue more bonds. Debt will finance about 38 percent of the coming year's budget, down from this year's 43 percent.

But as the government continues to run a deficit, debt servicing, interest payments and redemptions, are set to rise about 200 billion yen to 23.5 trillion yen.

Social-welfare spending, such as medical care, is set to rise 1 trillion yen to 31.5 trillion yen.

(Writing by William Mallard; Editing by Will Waterman)