+ All Categories
Home > Documents > Top-down Budgeting

Top-down Budgeting

Date post: 14-Jan-2016
Category:
Upload: vernon
View: 58 times
Download: 0 times
Share this document with a friend
Description:
Top-down Budgeting. A Tool for Central Resource Management December 15, 2006. 2006 OECD Asian SBO. Korea Institute of Public Finance John M Kim, PhD [email protected]. Outline. What is it? Why do it? How to do it? Caveats. What is Top-down Budgeting?. It is not: Bottom-up Budgeting - PowerPoint PPT Presentation
Popular Tags:
29
Top-down Budgeting A Tool for Central Resource Management December 15, 2006 Korea Institute of Public Fin ance John M Kim, PhD [email protected] 2006 OECD Asian SBO
Transcript
Page 1: Top-down Budgeting

Top-down Budgeting

A Tool for Central Resource Management

December 15, 2006

Korea Institute of Public Finance

John M Kim, PhD

[email protected]

2006 OECD Asian SBO

Page 2: Top-down Budgeting

2

1.What is it?

2.Why do it?

3.How to do it?

4.Caveats

Outline

Page 3: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

3

What is Top-down What is Top-down Budgeting?Budgeting?

It is not:It is not: Bottom-up Budgeting Bottom-up Budgeting– Traditional way of budgetingTraditional way of budgeting– Sum of ministry budgets Sum of ministry budgets Total budget Total budget

• Difficult to control aggregates (total budget, deficit)Difficult to control aggregates (total budget, deficit)• Difficult to control allocation among major sectorsDifficult to control allocation among major sectors

– Defense vs. pollution control vs. infrastructure, etc.– Additional ProblemsAdditional Problems

• Focus on annual numbers (myopic)Focus on annual numbers (myopic)• Inefficient processInefficient process

– Iterative negotiations (game-playing & adjusting for totals)

– Inability to utilize ministries’ expertise

Page 4: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

4

What is Top-down What is Top-down Budgeting? (2)Budgeting? (2)

It is:It is: Budgeting in 2 StepsBudgeting in 2 Steps

①① Ceilings (aggregate numbers)Ceilings (aggregate numbers)1)1) Decide total spending & deficit levels (agg. ceiling)Decide total spending & deficit levels (agg. ceiling)2)2) Decide allocation among major policy areas (sectoral ceilings: aDecide allocation among major policy areas (sectoral ceilings: a

bout 30)bout 30)– Defense vs. pollution control vs. infrastructure, etc.

②② Intra-sectoral allocations (details)Intra-sectoral allocations (details)1)1) Ministry/agency budgetsMinistry/agency budgets

Page 5: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

5

What is Top-down What is Top-down Budgeting? (3)Budgeting? (3)

It is:It is: AA Division of Roles/ResponsibilitiesDivision of Roles/Responsibilities

①① Ceilings (aggregate numbers)Ceilings (aggregate numbers)1)1) Final decision by PM & Finance MinisterFinal decision by PM & Finance Minister2)2) Focus on Focus on

Aggregate fiscal management Medium-term perspective (multi-year ceilings) Policy priorities

②② Intra-sectoral allocations (details)Intra-sectoral allocations (details)1)1) Ministries formulate their own budgetsMinistries formulate their own budgets2)2) But must follow rulesBut must follow rules

Page 6: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

6

What is Top-down What is Top-down Budgeting? (4)Budgeting? (4)

It is:It is:①① Effective for fiscal consolidationEffective for fiscal consolidation

②② A key tool for enforcing MTEF (NFMP) decisionsA key tool for enforcing MTEF (NFMP) decisions

(ceilings are often multi-year limits)(ceilings are often multi-year limits)

③③ Ensures spending is aligned with prioritiesEnsures spending is aligned with priorities

④④ Efficient in time and effortEfficient in time and effort

⑤⑤ Utilizes ministries’ expertiseUtilizes ministries’ expertise

Page 7: Top-down Budgeting

7

1.What is it?

2.Why do it?

3.How to do it?

4.Caveats

Outline

Page 8: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

8

Urgency of Reform?Urgency of Reform?

Huge deficits ca.1990 in many OECD countries forced them to adopt major Huge deficits ca.1990 in many OECD countries forced them to adopt major fiscal reformsfiscal reforms

19919911199199

22199199

33199199

44199199

55199199

66199199

77199199

88199199

99200200

00

• • Fiscal Balance (% GDP)Fiscal Balance (% GDP)

AustraliaAustralia -3.8-3.8 -6.0-6.0 -5.6-5.6 -4.6-4.6 -3.7-3.7 -2.2-2.2 -0.5-0.5 0.60.6 1.61.6 0.10.1

CanadaCanada -8.3-8.3 -9.1-9.1 -8.7-8.7 -6.7-6.7 -5.3-5.3 -2.8-2.8 0.20.2 0.50.5 1.61.6 3.23.2

DenmarkDenmark -2.4-2.4 -2.2-2.2 -2.9-2.9 -2.4-2.4 -2.3-2.3 -1.0-1.0 0.40.4 1.11.1 3.23.2 2.52.5

KoreaKorea 1.81.8 1.41.4 2.52.5 3.13.1 4.24.2 3.83.8 3.63.6 1.91.9 3.13.1 6.96.9

NetherlNetherlandsands

-3.2-3.2 -4.4-4.4 -3.6-3.6 -4.2-4.2 -4.2-4.2 -1.8-1.8 -1.1-1.1 -0.8-0.8 0.40.4 2.22.2

SwedenSweden -2.0-2.0 -7.8-7.8

--1111..44

--1100..88

-7.7-7.7 -3.1-3.1 -1.6-1.6 2.12.1 1.31.3 3.73.7

Utd. Utd. KingdoKingdomm

-3.1-3.1 -6.4-6.4 -7.9-7.9 -6.7-6.7 -5.8-5.8 -4.4-4.4 -2.2-2.2 0.40.4 1.11.1 1.61.6

OECD OECD -3.7-3.7 -4.6-4.6 -5.0-5.0 -4.2-4.2 -3.9-3.9 -3.2-3.2 -1.8-1.8 -1.4-1.4 -0.9-0.9 0.00.0

Page 9: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

9

Different Motivation for Different Motivation for KoreaKorea

Top-down adopted as key part of 4 fiscal Top-down adopted as key part of 4 fiscal reformsreforms

1)1) Need for longer-term perspectiveNeed for longer-term perspective

Anticipate need for controlling future spending Anticipate need for controlling future spending growth in social welfare, etc.growth in social welfare, etc.

2)2) EfficiencyEfficiency

a.a. Need to focus on broader policy prioritiesNeed to focus on broader policy priorities

b.b. Eliminate unproductive games in budget Eliminate unproductive games in budget negotiationsnegotiations

c.c. Utilize ministries’ expertiseUtilize ministries’ expertise

3)3) Need to focus on performance Need to focus on performance management, rather than controlling inputsmanagement, rather than controlling inputs

Page 10: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

10

(What are Korea’s 4 (What are Korea’s 4 Reforms?)Reforms?)

1.1. National Fiscal Management PlanNational Fiscal Management Plan– Medium-term (5-year) fiscal plan for 14 sectorsMedium-term (5-year) fiscal plan for 14 sectors

2.2. Top-Down budgetingTop-Down budgeting– Tier 1: Fixed spending envelope for each sector/ministryTier 1: Fixed spending envelope for each sector/ministry– Tier 2: Autonomy for line ministries in own budgetsTier 2: Autonomy for line ministries in own budgets

3.3. Performance ManagementPerformance Management– Assess performance of spending programsAssess performance of spending programs– Enhance link between performance and budgetEnhance link between performance and budget

4.4. Digital Budget and Accounting SystemDigital Budget and Accounting System– Program BudgetingProgram Budgeting– Accrual AccountingAccrual Accounting– Computerization of accounting systemComputerization of accounting system

Page 11: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

11

(Why the 4 Reforms?)(Why the 4 Reforms?)

Anticipate fiscal difficulties driven by aging & other Anticipate fiscal difficulties driven by aging & other socioeconomic changes socioeconomic changes

– Population aging and low fertility ratePopulation aging and low fertility rate• Old population (65 and above): 7.2 (2000) Old population (65 and above): 7.2 (2000) 14.4(2019) 14.4(2019)• Total fertility rate: 6.0(1961) Total fertility rate: 6.0(1961) 2.1(1982) 2.1(1982) 1.19(2003) 1.19(2003) Less workers must support welfare of more elderly people Less workers must support welfare of more elderly people

Public pensions and health care financing will suffer mostPublic pensions and health care financing will suffer most

– Society demands better quality of life (social welfare, education, Society demands better quality of life (social welfare, education, culture, environment)culture, environment)

– Economic growth slowing down Economic growth slowing down so will tax revenues so will tax revenues

– Emphasis on participation and transparencyEmphasis on participation and transparency

Spending growth may outrun revenue increase, so try to get Spending growth may outrun revenue increase, so try to get fiscal system in good shape before it’s too late fiscal system in good shape before it’s too late

Increase rate of national tax revenues(annual average)

1980~1990 1991~1997 1998~2003 2004~2008(Proj.) 17.0% 14.7% 8.6% About 8%

Page 12: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

12

(Some Background: Current (Some Background: Current Fiscal Status)Fiscal Status)

Up to the financial crisis, Korea’s public finances were solid, thanks to Up to the financial crisis, Korea’s public finances were solid, thanks to two decades of balanced budgeting two decades of balanced budgeting

Some deterioration resulted from coping against crisis (Some deterioration resulted from coping against crisis (national debt national debt more than doubled), but fiscal situation remains better than most other more than doubled), but fiscal situation remains better than most other OECD countriesOECD countries

What does this mean for the 4 Reforms?What does this mean for the 4 Reforms? Korea’s reforms are not driven by an immediate crisis, but this may Korea’s reforms are not driven by an immediate crisis, but this may

end up somewhat undermining the momentum of the reformsend up somewhat undermining the momentum of the reforms

<General Government Debt in OECD Countries, 2003>

Korea USA Japan OECD Total Debt (% of GDP) 23.0 62.8 157.3 76.0

<Korea’s National Debt>

1997 2000 2001 2002 2003 2004 Total Debt (in tn. won) 60 111 122 134 166 204 % of GDP 12.3 19.2 19.6 19.5 23.0 26.2

Page 13: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

13

Top-down vs. Bottom-upTop-down vs. Bottom-up

Comparison of Bottom-up & Top-down ApproachesComparison of Bottom-up & Top-down Approaches

Bottom-up Top-down

Ministry-by-ministry analysis that ignores economic forecasts

Macro-oriented fiscal analysis based on economic forecasts

Annual, myopic time horizon Multi-year perspective, especially for investments

Time-consuming negotiations Delegated authority

Ownership of proposals is more agency-specific Creates joint ownership of proposals

Reactive Proactive

Page 14: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

14

Top-down vs. Bottom-up (2)Top-down vs. Bottom-up (2)

Approaches to Determining Expenditure CeilingsTop-Down ApproachTop-Down Approach Bottom-Up ApproachBottom-Up Approach

Overall Overall CeilingCeiling

Sectoral Sectoral CeilingCeiling

Overall Overall CeilingCeiling

Sectoral Sectoral CeilingCeiling

Program Program ReviewReview

SwedenSweden ○○ ○○ -- -- △△

NetherlandsNetherlands ○○ ○○ -- △△ ○○

Utd. KingdomUtd. Kingdom ○○ ○○ -- △△ ○○

DenmarkDenmark ○○ ○○ -- △△ ○○

KoreaKorea ○○ ○○ -- △△ ○○

CanadaCanada ○○ -- -- ○○ ○○

AustraliaAustralia ○○ -- -- ○○ ○○

ChileChile ○○ -- -- ○○ ○○

○ : actively used, △ : used as reference, - : not used

• Top-down and bottom-up methods are complementary− Information for evaluating new initiatives− Program reviews for monitoring programs/activities

Page 15: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

15

Results?Results?

No more excessive budget requestsNo more excessive budget requests– Increase rate of budget requests in the general account Increase rate of budget requests in the general account

dropped significantly: 30.8%(’04) dropped significantly: 30.8%(’04) 11.7%(’05) 11.7%(’05) 7.0%(’06) 7.0%(’06)

Self-initiated restructuring of spending by line Self-initiated restructuring of spending by line ministriesministries

– Restructuring of multi-year programs and introduction of new Restructuring of multi-year programs and introduction of new programs have nearly doubledprograms have nearly doubled

<Comparison of FY 2004 and FY 2005 budget requests>

’04 Budget ’05 Budget Change

Programs 308 416 134 Restructuring

multi-year programs Amount (trillion won)

-1.6 -2.7 -1.1

Programs 351 459 108 Introduction of new programs Amount

(trillion won) 1.5 3.0 1.5

Page 16: Top-down Budgeting

16

1.What is it?

2.Why do it?

3.How to do it?

4.Caveats

Outline

Page 17: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

17

Example of Linking Multi-year Plans to the AnnuExample of Linking Multi-year Plans to the Annual Budget (Sweden)al Budget (Sweden)

Current Current YearYear(n)(n)

Plans for Future YearsPlans for Future Years

n+1n+1 n+2n+2 n+3n+3

20042004

FY 2005FY 2005•Total Ceiling FixedTotal Ceiling Fixed•Finalize 27 sect. ceilingFinalize 27 sect. ceilings and annual budgets and annual budget

FY 2006FY 2006•Total Ceiling FixedTotal Ceiling Fixed•Adjust 27 sect. ceilings usiAdjust 27 sect. ceilings using budget marginng budget margin

FY 2007FY 2007•Total Ceiling FixedTotal Ceiling Fixed•Set 27 Sect. CeilingsSet 27 Sect. Ceilings

+ budget margin+ budget margin

20052005

FY 2006FY 2006•Total Ceiling FixedTotal Ceiling Fixed•Finalize 27 sect. ceilingFinalize 27 sect. ceilings and annual budgets and annual budget

FY 2007FY 2007•Total Ceiling FixedTotal Ceiling Fixed•Adjust 27 sect. ceilings usiAdjust 27 sect. ceilings using budget marginng budget margin

FY 2008FY 2008•Total Ceiling FixedTotal Ceiling Fixed•Set 27 Sect. CeilingsSet 27 Sect. Ceilings

+ budget margin+ budget margin

20062006

FY 2007FY 2007•Total Ceiling FixedTotal Ceiling Fixed•Finalize 27 sect. ceilingFinalize 27 sect. ceilings and annual budgets and annual budget

FY 2008FY 2008•Total Ceiling FixedTotal Ceiling Fixed•Adjust 27 sect. ceilings usiAdjust 27 sect. ceilings using budget marginng budget margin

FY 2009FY 2009•Total Ceiling FixedTotal Ceiling Fixed•Set 27 Sect. CeilingsSet 27 Sect. Ceilings

+ budget margin+ budget margin

Page 18: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

18

Budget Formulation in Bottom-up Budget Formulation in Bottom-up vs. Top-down Systemsvs. Top-down Systems

Budget Requests

( by line items)

Budget Requests

( by line items)

Budget Formulation

(line item-oriented)

Budget Formulation

(line item-oriented)Y+1Y+1Y+1Y+1

NFMPNFMP

Total Ceiling Sectoral Ceilings

Total Ceiling Sectoral Ceilings

Budget Formulation Within Ceilings

Budget Formulation Within Ceilings

Consultation and Review Consultation and Review

Y+1Y+1Y+1Y+1

Y+5Y+5Y+5Y+5

Strategic resource allocation emphasizedStrategic resource allocation emphasized

Line Ministries MoF

MoFCabinet Meeting Line Ministries MPB

NowNowNowNow

BeforeBeforeBeforeBefore

Page 19: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

19

Determining Expenditure CeilingsDetermining Expenditure Ceilings

Overall CeilingOverall Ceiling①① Prudent Economic Assumptions (Growth, etc.)Prudent Economic Assumptions (Growth, etc.)

– Sensitivity analysisSensitivity analysis– Independent panel or private sector forecasting Independent panel or private sector forecasting – Built-in bias for lower growth rateBuilt-in bias for lower growth rate

②② Fiscal Rules for Good DisciplineFiscal Rules for Good Discipline– Sweden: structural surplus of 2% GDPSweden: structural surplus of 2% GDP– Chile: Structural surplus of 1% GDPChile: Structural surplus of 1% GDP– UK: Balance current budget over econ. cycleUK: Balance current budget over econ. cycle– Surplus automatically goes to repaying debtSurplus automatically goes to repaying debt

Page 20: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

20

Determining Expenditure Ceilings (2)Determining Expenditure Ceilings (2)

Sectoral CeilingsSectoral Ceilings– Must Must notnot affect overall ceiling affect overall ceiling– Usually overlaps with ministerial boundariesUsually overlaps with ministerial boundaries

(good program budget design)(good program budget design)− New initiatives may be required to be funded from savings from exiNew initiatives may be required to be funded from savings from exi

sting programssting programs

Page 21: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

21

Determining Expenditure Ceilings (3)Determining Expenditure Ceilings (3)

Operating/Capital CeilingsOperating/Capital Ceilings– Ministries tend to favor operating expensesMinistries tend to favor operating expenses

– Denmark: separate ceilings for current & capital Denmark: separate ceilings for current & capital expensesexpenses

• Sub-ceiling for salaries/wages in operating ceilingSub-ceiling for salaries/wages in operating ceiling

− UKUK

• Current expenses: Golden RuleCurrent expenses: Golden Rule

• Capital expenses: Sustainable Investment RuleCapital expenses: Sustainable Investment Rule

Page 22: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

22

Determining Expenditure Ceilings (4)Determining Expenditure Ceilings (4)

Number of CeilingsNumber of Ceilings– Korea (200+) vs. Sweden (27)Korea (200+) vs. Sweden (27)− Optimal number is around 30Optimal number is around 30

• More ceilings make budgeting decisions politically More ceilings make budgeting decisions politically difficultdifficult

• Need to give ministries room to exercise autonomy Need to give ministries room to exercise autonomy to ensure their proactive participationto ensure their proactive participation

• This means Budget Office needs better tools:This means Budget Office needs better tools:• Performance management• Information system to monitor execution• Enhanced analytical capacity for policy

assessment

Page 23: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

23

Determining Expenditure Ceilings (5)Determining Expenditure Ceilings (5)

Buffers against ContingenciesBuffers against Contingencies– Built-in buffers in prudent forecasts Built-in buffers in prudent forecasts

Windfalls (repay debt, tax cut, etc.)Windfalls (repay debt, tax cut, etc.)

− Budget MarginBudget Margin

• Overall Ceiling = Sect. Ceilings + Budget MarginOverall Ceiling = Sect. Ceilings + Budget Margin

• Covers unexpected changes (forecasts errors, etc.) Covers unexpected changes (forecasts errors, etc.) and institutional reforms after ceilings were fixedand institutional reforms after ceilings were fixed

• Usually does not cover new policy initiativesUsually does not cover new policy initiatives

Page 24: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

24

Determining Expenditure Ceilings (6)Determining Expenditure Ceilings (6)

Expenses in or excluded from ceilings?Expenses in or excluded from ceilings?1)1) Discretionary expenses usually includedDiscretionary expenses usually included

2)2) Mandatory expenses (social security Mandatory expenses (social security entitlements, etc., mandated by law)entitlements, etc., mandated by law)

• Sweden, Korea, Chile, Netherlands: includedSweden, Korea, Chile, Netherlands: included

• Canada, Denmark: excludedCanada, Denmark: excluded

3)3) Interest on debtInterest on debt

• Sweden, Denmark: excludedSweden, Denmark: excluded

• Chile, Netherlands, Korea: includedChile, Netherlands, Korea: included

Page 25: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

25

Determining Expenditure Ceilings (7)Determining Expenditure Ceilings (7)

Funding for new policy initiativesFunding for new policy initiatives• Sweden: must come from existing ceilingsSweden: must come from existing ceilings

• Most countries have review process to judge Most countries have review process to judge new initiatives new initiatives adjust ceilings adjust ceilings

• Australia, Canada: Cabinet committeesAustralia, Canada: Cabinet committees

• Netherlands, Denmark: simply verify fit with Netherlands, Denmark: simply verify fit with coalition agreementcoalition agreement

• Chile: pooled “Bidding Fund” from savings on Chile: pooled “Bidding Fund” from savings on obsolete or poorly performing programsobsolete or poorly performing programs

Page 26: Top-down Budgeting

26

1.What is it?

2.Why do it?

3.How to do it?

4.Caveats

Outline

Page 27: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

27

Conditions for Top-down BudgetingConditions for Top-down Budgeting

Good monitoring system to compensate for Good monitoring system to compensate for delegation of authority to ministriesdelegation of authority to ministries

– Performance & program reviewsPerformance & program reviews– Information system to monitor executionInformation system to monitor execution

Enhanced policy capacity + Behavioral changeEnhanced policy capacity + Behavioral change– Budget Office: better forecasts & projections, must be Budget Office: better forecasts & projections, must be

able to defend fiscal rules, but work better “together” able to defend fiscal rules, but work better “together” with line ministrieswith line ministries

– Ministries: need to learn internal allocation decisionsMinistries: need to learn internal allocation decisions Strong PM & Finance MinisterStrong PM & Finance Minister Commitment to rule-based budgeting (Fiscal Rules)Commitment to rule-based budgeting (Fiscal Rules)

– Remove arbitrariness in budgeting decisions, but Remove arbitrariness in budgeting decisions, but leave room for flexibility and judicious leave room for flexibility and judicious discretion/autonomydiscretion/autonomy

Support from the legislatureSupport from the legislature

Page 28: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

28

Remaining Tasks (Korea)Remaining Tasks (Korea)

Areas for improvementAreas for improvement– Consensus and understanding on the top-down systemConsensus and understanding on the top-down system– Ex-ante consultations with line ministries when setting spending ceilingEx-ante consultations with line ministries when setting spending ceiling

ss– Further expansion of autonomy at line ministriesFurther expansion of autonomy at line ministries– Insufficient preparation and guidelines by MPBInsufficient preparation and guidelines by MPB

Future plansFuture plans– Surveys and consultations with line ministriesSurveys and consultations with line ministries– Sectoral and ministerial spending ceilings set after sufficient discussioSectoral and ministerial spending ceilings set after sufficient discussio

nsns– Active use of performance assessments to restructure spending prograActive use of performance assessments to restructure spending progra

msms– Detailed budget formulation guidelinesDetailed budget formulation guidelines

Page 29: Top-down Budgeting

KOREA INSTITUTE OFPUBLIC FINANCE

29

This ends the presentationThis ends the presentation

Thank You!Thank You!


Recommended