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Top Down Budgeting

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Top Down Budgeting
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Top-down Budgeting A Tool for Central Resource ManagementJohn M. KimKorea Inst. of Public Financejhr!"ipf.re."r#utline$. %hat is Top-down Budgeting&'. (istorical Bac"ground). Issues in Implementation*. Prere+uisites,. -onclusion$.%hat is Top-down Budgeting&'. (istorical Bac"ground). Issues in Implementation*. Prere+uisites,. -onclusion#utline4Top-down s. Bottom-upTop-down Bottom-upProblems of Bottom-up BudgetingDifcult to control aggregate spendingSectoral allocations may not be optimalHard to keep multi-year perspectivenefcient formulation process-!ame-playing between budget ofce and line ministries-"inistries# e$pertise under-utili%ed5Top-down. Procedurall/ 0e1nedBudgeting in & Steps' (eilings )aggregate numbers*+* Decide total spending , de-cit levels )agg. ceiling*&* nter-sectoral allocation among ma/or policy areas )sectoral ceilings0 about 12*3 ntra-sectoral allocations )details*+* "inistry4agency budgets6Top-down. Functionall/ 0e1ned Division of 5oles45esponsibilities' (eilings )aggregate numbers*+* 6inal decision by P" , 6inance "inister&* 6ocus on 7ggregate -scal management"edium-term perspective )multi-year ceilings*Policy priorities3 ntra-sectoral allocations )details*+* "inistries formulate t8eir own budgets&* But must follow rules7Bene1ts of Top-down Budgeting' 9:ective for -scal consolidation3 9asier to integrate wit8 "T96 )"TB6*)ceilings are usually multi-year limits*; 9nsures spending is aligned wit8 priorities< 9fcient in time and e:ort= >tili%es ministries# e$pertise$. %hat is Top-down Budgeting&'.(istorical Bac"ground). Issues in Implementation*. Prere+uisites,. -onclusion#utline9Fiscal -rises as MotiationHuge de-cits ca.+??2 in @9(D countries

$22$$22'$22)$22*$22,$223$224$225$222'6667 Fiscal Balance 89 of :0P; pending [email protected] (eiling+* Prudent 9conomic 7ssumptions )!rowt8B etc.*G Sensitivity analysisG ndependent panel or private sector forecasting G Built-in bias toward lower growt8 forecast&* 6iscal 5ules for !ood DisciplineG Sweden0 structural surplus of &H !DPG (8ile0Structural surplus of +H !DPG >F0 Balance current budget over econ. cycleG Surplus automatically goes to repaying debt150etermining >pending -eilingsSectoral (eilings"ust not a:ect overall ceiling>sually overlap wit8 ministerial boundaries)good program budget design*Cew initiatives may be reIuired to be funded by savings from e$isting programs16Issues in >etting [email protected] vs. (apital (eilings"inistries tend to favor operating e$pensesDenmark0 separate ceilings for current , capital e$penses-Sub-ceiling for salaries wit8in operating ceiling>F-(urrent e$penses0!olden 5ule-(apital e$penses0Sustainable nvestment 5ule17Issues in >etting -eilingsCumber of (eilingsForea )&22J* vs. Sweden )&K*@ptimal number is around 12- "ore ceilings make budgeting decisions politically difcult- Ceed to give ministries room to e$ercise autonomy to ensure t8eir proactive participationT8is means Budget @fce needs better tools0- Performance management- nformation system to monitor e$ecution- 9n8anced analytical capacity for policy assessment18Issues in >etting -eilingsBu:ers against (ontingenciesBuilt-in bu:ers in prudent forecasts Lindfalls )repay debtB ta$ cutsB etc.*Budget Margin [email protected] (eiling M Sect. (eilings J Budget "argin-(overs une$pected c8anges )forecasts errorsB etc.* and institutional reforms after ceilings were -$ed->sually does not cover new policy initiatives19Issues in >etting -eilings9$penses ncluded in (eilingsN+* Discretionary e$penses usually included&* "andatory e$penses )social security entitlementsB etc.B mandated by law*SwedenB ForeaB (8ileB Cet8erlands0 included(anadaB Denmark0 e$cluded1* nterest on debtSwedenB Denmark0 e$cluded(8ileB Cet8erlandsB Forea0 included20Issues in >etting -eilings6unding for Cew Policy nitiativesSweden0 must come from e$isting ceilings"ost countries 8ave review process to /udge new initiatives ad/ust ceilings-7ustraliaB (anada0 (abinet committees-Cet8erlandsB Denmark0 simply verify -t wit8 coalition agreement-(8ile0 pooled OBidding 6undP from savings on obsolete or poorly performing programs$. %hat is Top-down Budgeting&'. (istorical Bac"ground). Issues in Implementation*.Prere+uisites,. -onclusion#utline22Prere+uisites for >uccess!ood monitoring system to compensate for delegation of aut8ority to ministriesPerformance , program reviewsnformation system to monitor e$ecutionPolicy capacity J Be8avioral c8angeBudget @fce0 better forecasts , pro/ectionsB need to defend -scal rules aggressivelyB but work better toget8er wit8 line ministries"inistries0 need to learn internal allocation decision-making23Prere+uisites for >uccessStrong P" , 6inance "inister"ust be able to enforce ceilings(ommitment to rule-based budgeting5emove arbitrariness in budgeting decisionsB but leave room for Qe$ibility and /udicious discretion4autonomySupport from t8e legislature$. %hat is Top-down Budgeting&'. (istorical Bac"ground). Issues in Implementation*. Prere+uisites,.-onclusion#utline25-onclusionTop-down budgeting is an e:ective approac8 to -scal consolidation Political will comes foremostR Top-down provides e:ective framework4tools 6ramework -ts well wit8 multi-year -scal discipline , rules-based budgeting ButB discipline tends to slacken as public -nances improve"any countries -nd it useful to 8ave0 7bout 12 sub-ceilings for optimal inter-sectoral allocations Separate ceilings for operating and capital e$penditures Budget margins as bu:ers against contingencies Some Qe$ibility in ad/usting ceilings for new policy initiatives 9$clusion of mandatory spending di:ers by country26-onclusionPrereIuisites for Success 6rom t8e Budget @fce- Lillingness to defend -scal rules aggressively- !ood monitoring J evaluation of spending programs- Better analytical capacity , ability to work toget8er wit8 ministries 6rom Sine "inistries- 7bility to prioriti%e and make own budgeting decisions 6rom P" , 6inance "inister- (ommitment to rule-based budgeting- Lillingness4ability to enforce ceilings 6rom t8e Segislature- Support for rules and ceilings27-onclusionDespite common features , principlesB practices di:er by country. Some balance needs to be struck between strict discipline and Qe$ibilityB especially at initial stage.Top-down system by itself does not guarantee good results Political willingness to 8onor rules , principles is essential (apacity of budget ofce )sta: J systems* is also a ma/or factor Be8avioral c8ange must followButB overallB 8as delivered desired results in countries t8at 8ave adopted [email protected] of Presentation

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