The government pledged to keep general spending excluding debt servicing at this year's level of around 71 trillion yen ($895.73 billion). New borrowing will also remain capped at 44 trillion yen, in line with Japan's medium-term fiscal plan.

But the spending and borrowing caps will not prevent Japan's debt -- already worth twice its annual economic output -- from growing, with the OECD estimating next year's budget deficit at 9 percent of GDP.

The government's plan to spur economic growth focuses on green energy, medical and farm sectors.

Last week, Prime Minister Yoshihiko Noda's government pushed through a controversial plan to double the sales tax to 10 percent by 2015 and is keen to convince voters that the economy will have enough momentum to withstand the tax hike's impact. {ID:nL4E8J98H6]

Ministries are expected to seek up to 4 trillion yen to fund growth policies, while they are required to cut public works and other discretionary spending by 10 percent or 1 trillion yen, a finance ministry official said.

Based on the guidelines, ministries will submit their budget requests to the finance ministry by September 7, before it compiles a draft 2013/14 budget in December.

Ageing of the Japanese population is expected to add 800 billion yen to social security costs, which take up the biggest part of next year's budget.

The first tax hike would come in April 2014 but it could be delayed if the economy does not perform well next year as the tax law includes a clause stipulating the government make a final decision in view of the state of the economy at the time.

The tax plan is seen as just a first step and on its own will not allow Tokyo to meet its aim of balancing its budget excluding debt-servicing by the year to March 2021.

This fiscal year's budget totals 90.3 trillion yen, including debt-servicing worth 22 trillion yen, with fresh borrowing accounting for nearly half of budget revenues.

($1 = 79.2650 Japanese yen)

(Reporting by Tetsushi Kajimoto; Editing by Tomasz Janowski)

• A Permanent Economic Emergency