mtef/top-down budgeting for korea dong yeon kim the world bank
TRANSCRIPT
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.”