The coalition, which also includes the Green Party, was formed after elections in Sweden in September.
Key policies that the grouping has promised to commit money to include setting up more primary schools, lowering taxes for pensioners and improving the country's railways.
Amid calls for stepped-up spending by European nations which can afford to do so, Sweden will now let its deficit rise to 2.2 percent of economic output, the highest level since 1996.
Sweden has also seen falling prices that has sparked concern of a dangerous deflationary spiral setting in that could lead to a recession, but so far is still expected to grow 2.1 percent this year.
The budget forecasts 3.0 percent growth next year.
Finance Minister Magdalena Andersson with the new budget. Photo: TT
Sweden is one of the few nations that has room to take on more debt under European rules, and despite the increased deficit its debt ratio is still expected to dip to 40.2 percent next year.
Social Democratic Finance Minister Magdalena Andersson put the blame for the increased deficit on unfunded tax cuts by her conservative predecessors rather than additional spending.
The policies of the previous government, in power from 2006 until its election defeat this autumn, had resulted in "an empty coffer," Andersson said on Thursday.
She added that it would be impossible to balance the budget before 2017.
During a video interview in English (below), Finance Minister Magdalena Andersson stressed the importance of fighting youth unemployment and reducing class sizes in school.
"The priorities are to reduce unemployment and increase employment, we have to reverse the negative trend in the Swedish school results, especially for the young children, but also invest more in our environment and to fight climate change," she said.
She explained that the moves will be funded by tax increases.
Expectations had built up around the announcement of defence spending figures, after the Swedish military's shortcomings were exposed during a fruitless hunt for a suspected foreign submarine off the Stockholm coast since last Friday.
However, the government proposed to increase defence spending by 3.1 percent, less than the 4.3 percent rise in 2014 and below the overall public spending hike for next year of 3.7 percent.
The hunt for a foreign vessel in the Stockholm archipelago has reached day seven. Photo: TT
The coalition has also included the Left Party in some of its discussions and this has influenced a decision to put two billion kronor towards increasing the number of staff in elderly care homes and raising maintenance payments for single parents.
The Social Democrats have already been accused of backing away from some of their campaign pledges, such as a promise to raise taxes in restaurants.
For the Greens, the budget demonstrates their success at pushing through initiatives such as greater investment in nature conservation, but the group has had to postpone its demand for higher taxes on petrol.
Funding for the budget is set to be raised by a series of tax increases including higher income taxes for Sweden's top earners and on alcohol and cigarettes.
The centre-right opposition parties were expected to criticize the new budget in a debate on Thursday. The Moderate Party, which led the previous ruling Alliance in Sweden has already argued that tax rises will hurt Sweden's economy.
In order for Stefan Löfven's coalition to remain in government, the budget must be passed by parliament and a rival centre-right budget also being presented must be rejected.
The nationalist Sweden Democrat party, which pulled in 12.9 percent of the votes in the September elections, has been threatening to vote against the new coalition's budget proposal. The move would mean the Alliance's budget could be accepted instead – provided the Sweden Democrats voted in favour of it – a move which in turn could lead to a re-election.
Mattias Karlsson has temporarily stepped into Jimmie Åkesson's shoes. Photo: TT
Acting party leader Mattias Karlsson told the Dagens Industri newspaper:
"I believe that the people who voted for us want us to take action so that we can have the best policies possible. If you look at the opinion polls since the election, we're one of the few parties that would benefit from a re-election," he said.
Political Scientist Li Bennich Björkman from Uppsala University thinks the party is just looking for attention.
"They want to show that they're a party to be reckoned with, it's like a psychological game," she said.
While she was cautious to predict whether the Sweden Democrats would actually vote against the budget, she said it would be unlikely they would be keen on a new election – especially considering party leader Jimmie Åkesson is sidelined with exhaustion.