* Budget presents test of PM Abe's resolve to fix public finances
* Abe counts on weak yen, low interest rates to limit borrowing
* Welfare costs boost spending, military, infrastructure outlay up
* Analysts doubt fiscal discipline at work, demand spending reform
TOKYO, Dec 22 (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 from this fiscal year's initial target to spend 96.7 trillion yen, the Ministry of Finance said on Thursday.
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.
Higher spending stems from a snowballing social security bill to fund the cost of services for Japan's fast-ageing population. A record military outlay and rising infrastructure costs also push up the overall spending.
On the other hand, tax income growth is seen slowing from this fiscal year, prompting the government to tap more non-tax revenue by using investment returns from foreign reserves, which stem from a weak yen and rising U.S. interest rates.
"We cannot count on a weak yen indefinitely to raise revenue given the risk of the currency's rises," said Takuya Hoshino, economist at Dai-ichi Life Research Institute. "To balance the budget, we must review spending through welfare reform that may be painful for the elderly."
Tax revenue for the fiscal 2017 is estimated at a 26-year high of 57.7 trillion yen, up 110 billion yen from this year's initial budget but slowing sharply from the pace of increase seen in recent years since Abe took office in late 2012.
The government plans to sell new bonds worth 34.37 trillion yen, slightly below this year's initially-planned 34.43 trillion yen, bringing debt dependency ratio to 35.3 percent, a nine-year low.
Debt-servicing costs will be reduced by 83.6 billion yen to 23.5 trillion yen, as the government assumed interest rates at a record low of 1.1 percent thanks to rock-bottom borrowing costs under the Bank of Japan's aggressive monetary stimulus.
To curb new bond issuance, the government will tap non-tax revenue of 5.4 trillion yen such as investment returns worth 2.5 trillion yen from foreign reserves. That marks an increase from 4.7 trillion yen in this fiscal year's initial budget.
Social security spending, the budget's biggest item, will rise 499.7 billion yen to a record 32.5 trillion yen, in line with the government's mid-term fiscal plan to limit rises in welfare outlays to 500 billion yen a year.
Defence spending hit a record 5.1 trillion yen, rising for a fifth straight year to cope with North Korea's missile threats and China's moves in the East China Sea.
Public works spending will increase for a fifth consecutive year to 6 trillion yen to beef up infrastructure to cope with natural disasters and promote projects aimed at spurring growth.
($1 = 117.5400 yen)
Reporting by Tetsushi Kajimoto and Minami Funakoshi; Editing by Shri Navaratnam