The proposed budget will boost spending on missile defence prompted by threats from North Korea, while cutting allocation on foreign aid and public works to restore fiscal health.

The Cabinet approved the 82.91 trillion yen (US$700 billion; Ð530 billion) budget proposal for the next fiscal year beginning next April at a Cabinet meeting, according to deputy Cabinet secretary Hiroshi Suzuki.

The budget is 4 percent larger than the 79.69 trillion yen (US$670 billion; Ð510 billion) initially earmarked for the current fiscal year ending next March.

The social security costs will increase 2.8 percent from the current fiscal year. The government is struggling to pay for rising retirement and health care costs for an increasingly elderly population, while trying to pick up additional child care costs to encourage more couples to have children.

Spending on a missile defence system will increase 30.5 percent to 182.6 billion yen (US$1.5 billion; Ð1.1 billion). Japan and the United States have been stepping up efforts to build a joint missile defence system following North Korea’s nuclear test in October.

But the draft budget also contains a range of belt-tightening steps, the most prominent of which is cutting the size of new bond sales by the largest amount ever.

Under the approved budget plan, the government will slash new government bond issues to 25.43 trillion yen (US$210 billion; Ð160 billion), down 15.2 percent from the current fiscal year.

Japan _ which has the biggest government debt in the industrialized world _ issues new securities to procure funds to fill the gap between spending and revenues. The proposed reduction is the largest in history and in line with Prime Minister Shinzo Abe’s well-advertised goal of cutting new bond issue.

The decision was helped by an unexpected rise in tax revenues, projected to surge 16 percent, the biggest rise ever seen.

The government will trim the overall defence budget to 4.8 trillion yen (US$40 billion; Ð30 billion), down 0.3 percent from the previous year. Japan’s official development assistance will decrease 4 percent and spending on public works will drop 3.5 percent, under the plan.

The budget will be presented to parliament in January.

I think this budget carries a strong message that Japan is determined to achieve the goal of restoring fiscal health,’ Abe told reporters after the Cabinet meeting.

Japan’s primary budget deficit, a key barometer of how bad Japan’s fiscal state is, is expected to fall to 4.4 trillion yen (US$37 billion; Ð28 billion) next fiscal year from around 11.2 trillion yen (US$94 billion; Ð71 billion) in the current year forecast.

Japan aims to bring its primary balance into the black in fiscal 2011 or even earlier.

Finance Minister Koji Omi said that Japan may be able to achieve the goal earlier. But Omi, speaking on a political show on TV Asahi Sunday, also said that it may not be easy as Japan is saddled with tasks to cope with its aging population.