Prime Minister Junichiro Koizumi dismissed calls Friday for a supplementary budget for the current fiscal year to pump-prime the flagging economy.

“Using tax money to fund public works projects (to stimulate the economy) is outdated,” Koizumi told reporters at the Prime Minister’s Official Residence, referring to mounting calls within the ruling bloc for the government to forge a stimulus package.

Finance Minister Masajuro Shiokawa and Heizo Takenaka, minister in charge of economic, fiscal and financial policy, said separately that now is not the time to contemplate an extra budget.

However, both indicated the idea could be resurrected if the economy worsens.

Proponents of a stimulus package argue that an extra budget is necessary to finance additional steps to fight deflation and support the economy, because more debt-ridden companies could go bankrupt if the government pushes forward with its plan to accelerate disposal of bad loans by banks.

Shiokawa reiterated his negative view regarding a supplementary budget during a news conference.

However, he noted there are “uncertainties” regarding the economy that stem from the accelerated disposal of banks’ bad loans.

Shiokawa said the government will stick to its decision to try to keep the issuance of new government bonds within the self-imposed 30 trillion yen cap.

But he left the door open for further stimulus measures, noting it remains to be seen what impact the world economic situation and the accelerated disposal of bad loans will have on the Japanese economy.

“We intend to retain the basic policy (on government bond issuances),” Shiokawa said. “But the economy is a living thing. . . . We can’t easily speak of a supplementary budget or a 30 trillion yen cap (at this time).”

As steps to support the economy, Shiokawa proposed raising the government’s credit guarantee for smaller firms and strengthening the ability of government-affiliated banks to channel funds into promising companies.

Shiokawa said he has proposed to Koizumi that these steps be considered as part of a safety net for possible economic turmoil stemming from the acceleration of bad-loan disposals.

“If we don’t prepare a safety net, I am afraid the economy will be thrown into chaos,” he said.

However, Shiokawa added his ideas are not yet the official government line.

He suggested raising the government guarantee for smaller firms when they take loans from private financial institutions, saying providing swift loans to smaller firms will become necessary.

At the same time, Shiokawa proposed reinforcing the supply of funds to viable companies and businesses via the Development Bank of Japan and other government-affiliated financial institutions.

Takenaka meanwhile said there are no plans to compile a supplementary budget at the moment, but he did not rule out the possibility of compiling one in the future.

“We are not thinking now about compiling a supplementary budget in the immediate future,” Takenaka said. “But at the same time, the prime minister’s consistent position has been that if there is a major shock, we will deal with it in a flexible and bold manner.”

So I think it is a question of whether we will face such a situation, or whether we determine we are already facing such a situation.”