The special budget bill was approved on Thursday but it has to be passed by the opposition-controlled parliament before it can take effect.
The NT$550 billion ($18 billion) in funds would be used to support industries hit by the United States' 20 percent tariff, and provide cash handouts to people, the cabinet said.
It also included NT$150 billion for strengthening Taiwan's defences, such as buying more coast guard patrol boats, making drones and boosting the military's command and control systems.
Defence Minister Wellington Koo said the funding would "increase our combat readiness" and "ensure operational resilience" as Chinese pressure on the island intensifies.
"In recent years, China has been increasing grey-zone harassment and military intimidation," Koo said.
"We cannot ignore the existence of such threats. We must face them and remain vigilant."
Taiwan lives under the constant threat of invasion by China, which claims the self-ruled island is part of its territory and has threatened to seize it by force.
The island has ramped up spending on military equipment and weapons over the past decade, but it remains heavily reliant on the United States to deter a Chinese attack.
President Lai Ching-te said last month Taiwan's defence spending was expected to reach five percent of gross domestic product by 2030.
His government has also announced plans to increase the 2026 defence budget to 3.32 percent of GDP.
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