TOKYO - JAPAN'S Cabinet approved a budget proposal on Wednesday that, if passed by lawmakers, will push spending to record levels as the country battles a rapidly worsening recession.

The Finance Ministry's draft budget consists of a spending increase of 6.6 per cent to 88.5 trillion yen (S$1.4 trillion) for the next fiscal year - the biggest ever figure in an initial proposal.

Prime Minister Taro Aso described the spending plan as a 'bold budget to protect people's lives'.

'The global economy next year will plummet,' he said at a press conference. 'And the pace of the slowdown is projected to be the steepest in the 60 years since World War II.'

The world's second-largest economy fell into a recession in the third quarter, and signs point to more misery ahead. The latest outlook by the Cabinet Office projects Japan's economy will shrink this fiscal year and manage only flat growth the following year.

The budget proposal said general spending will rise to 51.7 trillion yen (S$838.2 billion) in the year starting April, even though tax revenue is projected to fall 13.9 per cent to 46.1 trillion yen.

As a result, Japan will see its primary budget deficit jump to more than 13 trillion yen from 5 trillion yen this year, and will boost bond issuances by 31.3 per cent to cover the revenue shortfall.

The draft also calls for leaner defense and foreign aid allocations. Defence spending will decline for the seventh straight year to 4.8 trillion yen, while official development assistance will fall 4 per cent to 672.2 billion yen.

The draft budget will be submitted to parliament in January.

The expansion is likely to derail Tokyo's efforts to slim down toward its goal of balancing the budget by 2011. But Mr Aso, facing plummeting popularity ratings, has made it clear that this is no time for fiscal discipline.

On Friday, the central bank cut its key interest rate to 0.1 per cent, joining the US Federal Reserve in pushing borrowing costs close to zero. In its gloomiest assessment this year, the Bank of Japan cited the harsh impact of tumbling exports, weakening domestic demand, job losses and the growing credit crunch.

The prime minister has responded by introducing a slew of fiscal stimulus measures, including a 27 trillion yen package in October and a 43 trillion yen plan earlier this month.

The Cabinet on Saturday approved a 4.79 trillion yen supplementary budget for this fiscal year through March to fund some of the stimulus steps. Among Mr Aso's measures are expanded credits for small businesses, lower highway tolls and a cash payout to every household to spur spending.

Still, it may not be enough to trigger a turnaround for Mr Aso and his Liberal Democratic Party, which looks increasingly likely to lose its decades-long grip on political power.

The embattled Mr Aso has repeatedly come under fire for verbal gaffes and a lack of leadership through the global economic crisis.

His approval rating plunged to about 20 per cent in the three months since taking office.

The Cabinet on Wednesday also approved a timeline for raising Japan's consumption tax from the current 5 per cent, a level far too low to cover ballooning health and social welfare costs.

The ruling coalition aims to raise the sales tax in fiscal 2011, on condition that the economy improves. -- AP