MTEF/Top-down Budgetingfor Korea

Dong Yeon Kim

The World Bank

         

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Table of Content

Introduction of MTEF

Korea’s MTEF Initiatives

Issues To Be Addressed

Implementation Strategy for Korea

Introduction of MTEF

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Background of MTEF

Changing role of budgeting - from control (spending) to management

(policy)

Increasing difficulty of maintaining fiscal

soundness - slowed economic growth, built-in entitlement

Growing demand for public spending - aging population, education, social welfare

Demand for more democratized and transparent budgeting process

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Objectives of MTEF

Integrating policy priorities into annual budget Providing mid-term perspective (3-5 yrs)

on expenditure plan

Enhancing operating efficiency

Strengthening feedback and accountability

mechanism by performance management

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MTEF Process (simplified)

Sectoral Budget

Preparation

Macro-economic

forecasting

Sectoral Ceiling

Setting for multi years

Fiscal Target

Total Expenditure

SettingFor multi

years

New sectoral

demand for t+2

(priority/cost)

Annual Budget

Formulation

Updated costestimate of

existingpolicy/program

International Trend (1)

CBO: central budget office, MoF: different part of MoF/TreasurySource: OECD-World Bank Budget Practices and Procedures Database

Coverage of

MTEF

Responsibility of economic assumption

Multi-year cost estimate for new spending

Sweden 3 yrs MoF* All spending item

Norway varying MoF* No

UK 5 yrs CBO All spending item

Australia 4 yrs CBO All spending item

NZ 2 yrs MoF* All spending item

USA N/A N/A All spending item

International Trend (2)

Source: OECD-World Bank Budget Practices and Procedures Database

Basis of setting spending limit for

ministries

Final decision on ministries’ spending

Arrangement in congress to establish total budget before

individual item

Sweden MTEF Prime Minister

Yes

Norway N/A Cabinet Yes

UK MTEF MoF No

Australia MTEF Cabinet No

NZ MTEF Cabinet No

USA Suggestion only President Yes

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Lessons from International Experiences

Integration of multi-year planning with annual budget

- MTEF and annual budgeting is ‘one’ process

Honest/realistic macroeconomic forecasting

Separation of total budget from detailed program

Clarification of new roles of MOF/line ministries

Capacity building and incentives for MOF/line ministries

Development of feedback mechanism

Korea’s MTEF Initiative

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Current Budgeting in Korea

Centralized, itemized budgeting

Heavy weight on bottom-up approach

MPB’s active involvement in program details

Lack of macro consideration and mid-term plan

- institutional division between MPB and MoFE

Fiscal reform initiatives with mixed results

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Budgeting Process in KoreaFeb Mar Apr May Jun Jul Aug Sep Oct

Receive budget request, avaialable resources and

direction for budget preparation

Line Ministries

Other Players

MPB

Submit written

request for budget

based on the

Office of the

President

Review budget requests, request additional information, and finalize 'MPB draft' ('budget season')

Review/ revise draft with ruling party

Finalize and report the resived draft to the President

Report to President subitted request

Active interaction with budget examiner ( answering question, providing additional information and visting the MPB office

Review MPB draft including, specific programs

Review and approve the budget

Cabinet meeting approval

innitial estimate of total budget

Prepare macro forecast & estimate budget demands

Budget Review Committee - Adjust total size by integrating micro demand and macro-limits

Finalize the total estimate of budget

'operational plan' for new programs/major on-goingprograms submission

Receive budget request, avaialable resources and direction for budget preparation

Submit written request for budget based on the 'Guidelines'

Pprepare and distribute 'Guidelines for budget request'

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Track-record of linking budgeting with national planning

Economic Planning Board (EPB), 1961-1994: - planning and budgeting functions under one roof Strong political support and leadership

- monthly President’s visit to EPB

- minister of EPB holds position of DPM

(influence over line ministry for coordination)

In retrospect, MTEF exercise without calling it MTEF

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Past Fiscal Reform Efforts in Korea

Strengthening linkage between formulation and execution

Bringing in incentive system for expenditure savings

Piloting performance-based budgeting

Introducing double-entry accounting system

Improving aggregate expenditure control

Introducing ex-ante evaluation system for major projects

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Why MTEF?

Short-term Perspective with Bottom-up Approach

- Yearly based revenues and expenditures

- Weak linkage between national policy priorities and budgeting

Future Fiscal Risk

- Social welfare expenditure demands/rapidly aging population

Inefficiency from Managerial Inflexibility

- Limited autonomy to plan policy and implement budget

MTEF Process in Korea (planed)

`

Updated CostEstimate

Macro Forecasting

& LTFP

Cabinet Meeting

Sectoral & Ministerial

Ceilings

Line Ministries’ Requests

Review & Budget

Document-tation

Fiscal Targeting

& Budget

Envelope

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New Budget Process (1)

Stage I : Macro-economic Forecasting and

Long-term Financial Management Planning

- Macro-forecasting and review of national debt levels

Stage II : Fiscal Targeting and Budget Envelope

- Set fiscal targets and policy, and total budget aggregate

Stage III : Sectoral and Ministerial Ceilings

- Decide objectives, sectoral and ministerial expenditure limits

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New Budget Process (2)

Stage IV: Cabinet Meetings

- Agree on macro-forecasting, long-term plans, fiscal targeting,

expenditure aggregates and sectoral ceilings

Stage V: Line Ministries’ Requests

- Prepare budget proposal within guidelines

Stage VI: Review and Budget Documentation

- Review line ministries’ requests for compliance with sectoral

limits and policy priorities

Issues To Be Addressed

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How to Build Macro Forecasting Capacity in MPB?

MPB plays a key role in macro forecasting for fiscal policy purpose - strong need to increase institutional capacity - consideration of social/political factors

Coordination mechanism with MoFE, BoK, public/private research institutes

Formula for conservative forecasting for budgeting - in Canada, add 0.5-1% to forecasted interest rates

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How/Who Decide Total Budget & Sectoral Ceiling? (1)

Two stage approach: total envelope setting sectoral allocation

Total budget setting - macro/fiscal targets, social/political demands - new sectoral demands and updated costs estimates

Sectoral allocation - national policy priority - determined within total budget : zero-sum game

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How/Who Decide Total Budget & Sectoral Ceiling? (2)

Final draft is prepared by MPB in consultation with the President

Send draft to cabinet meeting for consensus building - sectoral ceiling is not revealed until total decided - in Sweden, 2-3 days’ cabinet retreat

In case of disagreement, final decision is made by President

“It is President who holds ultimate responsibility of budget”

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Use of budget margin

Serves as a Bumper for 1) macro forecasting deviations

2) ‘inevitable’‘unexpected’ demand

3) President’s new initiatives under exceptional situations

Budget margin

= total envelope – aggregate of sectoral ceiling * in Sweden, 3.33% in 1997, and 0.05% in 2003

Unused margin to be used to accelerate debt payment

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How much sectoral ceiling is binding?

In principle, no breach is allowed

Amendment allowed for substantial macroeconomic change (cost estimate basis)

Exception is explicitly identified ex-ante with MPB’s consent, through cabinet meeting

1) ministry makes trade-off within sectoral cap

2) trade-off between ministries within total budget

3) budget margin to be used

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How Much Discretion Allowed for Line Ministries?

Sectoral priority discussed and agreed

between MPB and line ministries Line ministries prepare own budget request

within provided ceiling & priority line

MPB’s monitoring and coordination mechanism

Incentive for efficient spending - allowed to carry-over certain % of savings to ministries

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How to Build Incentive System?

For MPB- Shift to higher level, macro decision-making

by integrating national policy priorities with budgeting

- Close interaction with President

For Line Ministries

- Budgetary Discretion to prioritize policies

- Flexibility in implementing policy and executing budget

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How to Ensure Line Ministries’ Accountability? (1)

Ministers hold ultimate responsibility over performance

MPB plays a watchdog Performance management serves as a feedback mechanism for increased discretion

Linking budgeting with accounting system Information system needs to be integrated between MPB, MOFE, line ministries, and NAB

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How to Ensure Line Ministries’ Accountability? (2)

Performance Management System

- utilized as information gathering and analysis

- long-term, phased approach is desirable

- need to adopt realistic short-term approach

- pilot projects to introduce output-based indicator

development and performance evaluation system

- expand into all programs with outcome indicators

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How to Improve Budget Structure and Scope ?

Need for strong budget basics and

for simplified budgetary complexity

Complexity of budget structure

- One General Account, 23 Special Accounts, 45 Funds,

2,000 appropriations, and 6,000 sub-accounts

Classification system emphasises input controls

Lacks transparency and is technically cumbersome

Implementation Strategy for Korea

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Pre-conditions for Implementing MTEF

Strong political support MPB’s willingness/commitment - clear understanding of MTEF and incentives - strong leadership within MPB

Line ministries’ compliance - proper incentives: discretion and policy

prioritization

Capacity building for MPB and line ministries

Legal framework for new

roles/responsibilities

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Creating Enabling Environment for MTEF

Use MTEF as an instrument to alter status quo

Fiscal reform along with PS reform

Leadership and Capacity Building

- champion of reform and creating core team

- motivating self-development and capacity

building Performance oriented environment in

government

- e.g., regulation-free organizations

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Implementation Strategy

Stage I : top-down approach (Big Bang Approach) - macroeconomic forecasting and fiscal target setting - setting total and sectoral ceiling prior to program details

Stage II : bottom-up approach (Gradual Approach) - line ministries’ discretion within sectoral ceiling and priority - allowing discretion on operating costs

Stage III :incorporation with performance management - well-functioning information system - performance information reflected in budgetary decision

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“A budget is much more than

a collection of numbers.

A budget is a reflection of

a nation’s priorities, its needs, and its

promise.”