Reforming the Fiscal Reforming the Fiscal Management System in KoreaManagement System in Korea

June 2005June 2005

Youngsun KohYoungsun Koh

Korea Development InstituteKorea Development Institute

-2-

Traditionally, three roles are assigned to fiscal policy:Traditionally, three roles are assigned to fiscal policy:

• Reallocating the resourcesReallocating the resources in the economy by providing in the economy by providing public goods in the hope of correcting market failures.public goods in the hope of correcting market failures.

• Redistributing income and wealthRedistributing income and wealth with the tax and benefit with the tax and benefit system and also with the public education and other system and also with the public education and other services.services.

• Stabilizing the macro-economyStabilizing the macro-economy in the short and long term. in the short and long term.

– A counter-cyclical fiscal policy, if implemented A counter-cyclical fiscal policy, if implemented appropriately, can help to smooth out the short-term appropriately, can help to smooth out the short-term cyclical fluctuations.cyclical fluctuations.

– Fiscal policy can contribute to a stable, long-term growth Fiscal policy can contribute to a stable, long-term growth and low inflation by maintaining sound budgetary and low inflation by maintaining sound budgetary positions and limiting the rise in public debt.positions and limiting the rise in public debt.

The Role of Fiscal PolicyThe Role of Fiscal Policy

-3-

Budget Surplus/DeficitBudget Surplus/DeficitKorea OECD Korea OECD

Note: Consolidated central government. Note: General government.Source: Ministry of Finance and Economy. Source: OECD.

Budget BalanceBudget Balance

Fiscal consolidation in the early 1980s restored the budget balanceFiscal consolidation in the early 1980s restored the budget balanceto a sustainable path.to a sustainable path.

- 5

- 4

- 3

- 2

- 1

0

1

2

3

4

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

(% of GDP)

- 5

- 4

- 3

- 2

- 1

0

1

2

3

4

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

(% of GDP)

-4-

Note: Real values were obtained by deflating nominal values with GDP deflator.Source: Ministry of Finance and Economy.

Growth of Real Expenditure and RevenueGrowth of Real Expenditure and Revenue

Spending GrowthSpending Growth

Fiscal consolidation in the 1980s took the form of expenditure Fiscal consolidation in the 1980s took the form of expenditure restraint rather than revenue increase.restraint rather than revenue increase.

- 15

- 10

- 5

0

5

10

15

20

25

30

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03

(%) Real growth in expenditure and net lending

Real growth in revenue

-5-

Government LiabilitiesGovernment Liabilities

Government LiabilitiesGovernment LiabilitiesKorea OECDKorea OECD

Note: Central government. Note: General government, at the end of 2003. Source: Ministry of Finance and Economy. Source: OECD.

The debt-to-GDP ratio declined steadily since the early 1980sThe debt-to-GDP ratio declined steadily since the early 1980sbut increased rapidly after the crisis. but increased rapidly after the crisis.

0

20

40

60

80

100

120

140

160

Luxe

mbo

urg

Austr

alia

Kore

aIre

land

Norw

ayNe

w Ze

aland

Icelan

dSlo

vak R

epub

licDe

nmar

k Po

land

Unite

d Ki

ngdo

mFin

land

Neth

erlan

dsPo

rtuga

lSw

eden

Unite

d St

ates

Au

stria

Spain

Ge

rman

yFr

ance

Cana

daGr

eece

Belgi

um Italy

Japa

n

(% of GDP)

0

5

10

15

20

25

30

35

40

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

Guarantees

Central government liabilities

(% of GDP)

-6-

Debt / GDP RatioDebt / GDP Ratio

Sources: 1953-90, Korea Development Institute; 1991-2003, Ministry of Planning and Budget.

During the early days of government-led economic growth,During the early days of government-led economic growth,foreign borrowings played a crucial role in providing the resourcesforeign borrowings played a crucial role in providing the resourcesfor public and private investment.for public and private investment.

Government LiabilitiesGovernment Liabilities

0

10

20

30

40

50

53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04

(% of GDP) Government guarantees Procurement on Credit Foreign borrowings Domestic borrowings Government bonds Central government debt

-7-

Source: Ministry of Finance and Economy.

Central Government Spending and RevenueCentral Government Spending and Revenue

Size of SpendingSize of Spending

Expenditure and net lending as % of GDP declined throughout the Expenditure and net lending as % of GDP declined throughout the 1980s and then rose in the 1990s. 1980s and then rose in the 1990s.

13

15

17

19

21

23

25

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

(% of GDP) Expenditure and Net Lending

Revenue

-8-

Source: OECD

General Government ExpendituresGeneral Government Expenditures

The total government spending corresponded to 23.0% of GDP,The total government spending corresponded to 23.0% of GDP,much lower than in other countries. much lower than in other countries.

Size of SpendingSize of Spending

- 10

0

10

20

30

40

50

Korea U.S J apan Germany France U.K. Canada

(% of GDP)

Consumption

Investment

Subsidies

Interest payment

Others

Transfer

-9-

Tax and Social Security BurdenTax and Social Security Burden

The increase in spending has been accompanied by an increase The increase in spending has been accompanied by an increase in tax and social security burdens.in tax and social security burdens.

Tax Burden and Social Security BurdenTax Burden and Social Security Burden

Korea OECDKorea OECD

10

15

20

25

30

35

40

45

50

55

Mexic

oKo

reaJa

pan U.S

Irelan

dAu

strali

aSw

itzerl

and

Slova

k Rep

.Po

rtuga

lPo

land

New

Zeala

ndCa

nada

Spain

Turke

yIce

land

Germ

any

Gree

ce U.K

Czec

h Rep

.Hu

ngary

Nethe

rland

Lexe

mburg

Italy

Norw

ayFra

nce

Austr

iaBe

lgium

Finlan

dDe

nmark

Swed

en

Social security contributions

Tax revenues

(% of GDP)

0

5

10

15

20

25

85 87 89 91 93 95 97 99 01 03

Social security contributions

Tax revenues

(% of GDP)

-10-

Source: Ministry of Finance and Economy.

 1970 1980 1990 2000

General public servicesDefensePublic order and safetyEducationHealthSocial protectionHousing and Community AmenitiesRecreation, culture, and religionEconomic affairsOther expenditures

23.1 22.7

-16.7 1.3 4.9 0.3

  1.4 27.4 2.2

4.0 30.6 4.6 14.6 1.0 5.7 2.5

  0.7 26.0 10.4

4.2 20.0 4.3 17.0 1.7 8.1 10.1

  0.5 20.4 13.7

5.211.4 4.615.3 0.715.3 5.3

  0.825.216.2

Trends of Expenditure and Net LendingTrends of Expenditure and Net Lending

Economic affairs has taken the largest share in total spending.Economic affairs has taken the largest share in total spending.The spending on social protection is on the rise after the recentThe spending on social protection is on the rise after the recentcrisis.crisis.

Sectoral Allocation of SpendingSectoral Allocation of Spending

  (% of total expenditure and net lending)

2003

6.711.4 5.315.0 0.413.5 5.0

  0.828.712.8

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Spending on Economic AffairsSpending on Economic Affairs

Spending on economic affairs corresponds to 6% of GDP, farSpending on economic affairs corresponds to 6% of GDP, far

higher than those in advanced countries.higher than those in advanced countries.

Note : Central government for Korea and general government for others.Source : IMF.

0

1

2

3

4

5

6

7

US Germany France UK Canada Korea

(% of GDP)

Other economicAffairs

Transportationand communication

Mining,manufacturing, andconstruction

Agriculture andfisheries

Fuel and energy

Spending on Economic AffairsSpending on Economic Affairs

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Government Lending Outstanding Stock of LoansGovernment Lending Outstanding Stock of Loans

Note: Net lending = new loans - repayments.Sources: Ministry of Finance and Economy.

Government LendingGovernment Lending

The spending on economic affairs often takes the form of lending.The spending on economic affairs often takes the form of lending.

(% of GDP)

0

5

10

15

20

25

30

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03

Gross liabilities

Outstanding stock of loans

- 1

0

1

2

3

4

5

6

7

8

9

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

(% of GDP)

New loans

Net lending

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Coping with the Crisis of 1997Coping with the Crisis of 1997

During 1998-2002, the government made loans to the During 1998-2002, the government made loans to the Korea Deposit Korea Deposit Insurance Corporation (KDIC)Insurance Corporation (KDIC) and the and the Korea Asset Management Korea Asset Management Corporation (KAMCO)Corporation (KAMCO) in the amount of interest payment on in the amount of interest payment on the restructuring bonds issued by these corporations.the restructuring bonds issued by these corporations.

The government also provided guarantees on these bonds.The government also provided guarantees on these bonds.

In 2002, the government announced a plan to take up the obligation In 2002, the government announced a plan to take up the obligation on part of the bonds (49 trillion won) and transform them into on part of the bonds (49 trillion won) and transform them into treasury bonds. The rest would be repaid by the KDIC and KAMCO.treasury bonds. The rest would be repaid by the KDIC and KAMCO.

In 2003, 13 trillion won was spent on the transformation. The figureIn 2003, 13 trillion won was spent on the transformation. The figurefor 2004-2006 is 12 trillion won each year.for 2004-2006 is 12 trillion won each year. In addition, the government expanded the welfare programs In addition, the government expanded the welfare programs significantly to help the poor and the unemployed.significantly to help the poor and the unemployed.

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Overall, fiscal policy in Korea has carried out its roles rather Overall, fiscal policy in Korea has carried out its roles rather successfully:successfully:

• Resource allocation:Resource allocation: The emphasis was placed on The emphasis was placed on promoting the economic growth with large spending on promoting the economic growth with large spending on education, infrastructure, and other public goods.education, infrastructure, and other public goods.

• Income distribution:Income distribution: After the crisis, spending on social After the crisis, spending on social protection is increasing rapidly, and is expected to increase protection is increasing rapidly, and is expected to increase further in coming years.further in coming years.

• Stabilization:Stabilization: The prudent management of fiscal policy The prudent management of fiscal policy contributed to a sound budgetary position and a low debt-to-contributed to a sound budgetary position and a low debt-to-GDP ratio.GDP ratio.

– But the short-term stabilization has been limited due to But the short-term stabilization has been limited due to the small sizes of tax revenues and welfare spending.the small sizes of tax revenues and welfare spending.

AssessmentAssessment

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Source: Bank of Korea.

Output Growth and InflationOutput Growth and Inflation

AssessmentAssessment

The Korean economy recorded an average growth rate of around The Korean economy recorded an average growth rate of around 8%. The inflation was reduced drastically in the early 1980s and 8%. The inflation was reduced drastically in the early 1980s and declined further after the crisis of 1997.declined further after the crisis of 1997.

- 10

- 5

0

5

10

15

20

25

30

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03

(%)

Gross Domestic Product

Consumer Price Index

-16-

Sources: National Statistical Office; Hyun (2003) and Yoo (2004).

AssessmentAssessment

Korea is also known as a country with a relatively equitable Korea is also known as a country with a relatively equitable distribution of income, even though the inequality rose distribution of income, even though the inequality rose significantly after the crisis.significantly after the crisis.

Labor Market Indicators Gini CoefficientLabor Market Indicators Gini Coefficient

0.0

0.1

0.2

0.3

0.4

0.5

Swed

en (1

995)

Norw

ay (1

995)

Polan

d (19

99)

Finlan

d (20

00)

Nethe

rland

s (19

94)

Czec

h (19

96)

Germ

any (

1994

)

Franc

e (19

94)

Korea

(199

6)

Spain

(199

0)

Cana

da (1

998)

Switz

erlan

d (19

92)

Austr

alia (

1994

)

Irelan

d (19

96)

Italy

(1995

)

U.K (

1999

)

Korea

(200

0)

U.S (

2000

)

Russi

a (19

95)

Mexic

o (19

98)

0

2

4

6

8

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

52

55

58

61

64(%) (%)

Unemployment rate

Economic participation ratio

-17-

Containing the spending growthContaining the spending growth

• Revenue growth is expected to fall in line with output growth.Revenue growth is expected to fall in line with output growth.

• Spending is on a rising trend due in large part to the Spending is on a rising trend due in large part to the increasing welfare spending, especially on pension and increasing welfare spending, especially on pension and health.health.

Redefining the role of governmentRedefining the role of government

• Reducing the direct support to businesses.Reducing the direct support to businesses.

• Expanding basic public services such as judicial services, Expanding basic public services such as judicial services, promotion of competitive business practices, statistical promotion of competitive business practices, statistical services.services.

Enhancing the efficiency of spendingEnhancing the efficiency of spending

• Promoting the autonomy and accountability of line ministries.Promoting the autonomy and accountability of line ministries.

• Greater focus on outputs and outcomes.Greater focus on outputs and outcomes.

ChallengesChallenges

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• Revenue sources: general-purpose taxes and non-tax revenues. Revenue sources: general-purpose taxes and non-tax revenues. • Carry-over: not allowed in principle.Carry-over: not allowed in principle.• Asset holding: not allowed.Asset holding: not allowed.• Managed through the treasury single account.Managed through the treasury single account.

• Revenue sources: ear-marked taxes, levies, and other Revenue sources: ear-marked taxes, levies, and other revenues.revenues.

• Example: Transportation Infrastructure Special Account.Example: Transportation Infrastructure Special Account.• Carry-over: not allowed in principle.Carry-over: not allowed in principle.• Asset holding: allowed.Asset holding: allowed.• Managed through the treasury single account.Managed through the treasury single account.

• Revenue sources: ear-marked taxes, levies, and other Revenue sources: ear-marked taxes, levies, and other revenues.revenues.

• Example: National Pension Fund.Example: National Pension Fund.• Carry-over and asset holding: allowed.Carry-over and asset holding: allowed.• Can change spending up to 30% without approval from MPB Can change spending up to 30% without approval from MPB

and the National Assembly.and the National Assembly.• Managed independently by line ministries .Managed independently by line ministries .

Complicated Budget StructureComplicated Budget Structure

GeneralGeneralaccountaccount

(1)(1)

GeneralGeneralaccountaccount

(1)(1)

SpecialSpecialaccountaccount

(23)(23)

SpecialSpecialaccountaccount

(23)(23)

PublicPublicfunds funds (57)(57)

PublicPublicfunds funds (57)(57)

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Public fundsPublic funds• Previously, public funds were off-budget; they did not need to Previously, public funds were off-budget; they did not need to

go through the approval process of the National Assembly.go through the approval process of the National Assembly.• Now the same approval process is applied to public funds as Now the same approval process is applied to public funds as

to the general and special accounts.to the general and special accounts.• The revised Basic Law on Public Fund Management mandatThe revised Basic Law on Public Fund Management mandat

es MPB to examine the raison d’etre of individual funds every es MPB to examine the raison d’etre of individual funds every 3 years and to recommend their abolition or consolidation wh3 years and to recommend their abolition or consolidation when needed.en needed.– The first such exercise was carried out last year.The first such exercise was carried out last year.

Special accountsSpecial accounts• The government is currently preparing a plan to restructure aThe government is currently preparing a plan to restructure a

nd streamline special accounts and public funds.nd streamline special accounts and public funds.

Reforming the Budget StructureReforming the Budget Structure

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Presidential system of governmentPresidential system of government Ministry of Planning and Budget (MPB)Ministry of Planning and Budget (MPB)

– Prepares the budget and tables it on the National Assembly.Prepares the budget and tables it on the National Assembly. Ministry of Finance and Economy (MOFE)Ministry of Finance and Economy (MOFE)

• Treasury BureauTreasury Bureau– Releases cash to spending ministries.Releases cash to spending ministries.

– Issues treasury bonds and manages assets and liabilities.Issues treasury bonds and manages assets and liabilities.

• Tax and Customs OfficeTax and Customs Office– In charge of tax policy and revenue forecasts.In charge of tax policy and revenue forecasts.

Board of Audit and Inspection (BAI)Board of Audit and Inspection (BAI)– The supreme audit institution in Korea, reporting to the The supreme audit institution in Korea, reporting to the

president.president. National AssemblyNational Assembly Line ministriesLine ministries

Major Players in the Budget ProcessMajor Players in the Budget Process

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Strategic dominanceStrategic dominance-based approach-based approach (von Hagen and Harden, 1996)(von Hagen and Harden, 1996)

• The MPB has a clear upper hand vis-à-vis line mThe MPB has a clear upper hand vis-à-vis line ministries in budget negotiations.inistries in budget negotiations.

• The National Assembly is prohibited from increaThe National Assembly is prohibited from increasing the total spending or introducing new spendsing the total spending or introducing new spending items without consent from the government.ing items without consent from the government.

• Strict cash limits are imposed on ministerial spenStrict cash limits are imposed on ministerial spending by the MOFE.ding by the MOFE.

• The BAI performs both financial auditing and regThe BAI performs both financial auditing and regularity check of ministerial activities.ularity check of ministerial activities.

Highly Centralized Budget ProcessHighly Centralized Budget Process

Budget Budget preparation preparation

and and finalizationfinalization

Budget Budget preparation preparation

and and finalizationfinalization

ExecutionExecutionExecutionExecution

Ex post Ex post controlcontrolEx post Ex post controlcontrol

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The MPB devoid of policy coordination functionThe MPB devoid of policy coordination function

(1970s and 1980s) (Early 1990s) (Late 1990s to this day)

Democratization of the Korean politicsDemocratization of the Korean politics• The balance of power tipping toward the legislatureThe balance of power tipping toward the legislature

Increased public demand for active fiscal policy to boost the econIncreased public demand for active fiscal policy to boost the economyomy• More supplementary budgets introduced during a yearMore supplementary budgets introduced during a year• Front-loading of annual spendingFront-loading of annual spending

Transition toward a Transition toward a targettarget--based approach being called forbased approach being called for

Signs of Weakened Fiscal DisciplineSigns of Weakened Fiscal Discipline

Economic PlanningEconomic PlanningBoard (EPB)Board (EPB)Economic PlanningEconomic PlanningBoard (EPB)Board (EPB)

Ministry of FinanceMinistry of Finance(MOF)(MOF)Ministry of FinanceMinistry of Finance(MOF)(MOF)

Ministry of Planning Ministry of Planning and Budget (MPB)and Budget (MPB)Ministry of Planning Ministry of Planning and Budget (MPB)and Budget (MPB)

Ministry of FinanceMinistry of Financeand Economy (MOFE)and Economy (MOFE)Ministry of FinanceMinistry of Financeand Economy (MOFE)and Economy (MOFE)

Ministry of FinanceMinistry of Financeand Economy (MOFE)and Economy (MOFE)Ministry of FinanceMinistry of Financeand Economy (MOFE)and Economy (MOFE)

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Introducing an MTEFIntroducing an MTEF

Planning Planning horizonhorizon

Planning Planning horizonhorizon

Next single Next single budget yearbudget year

Next single Next single budget yearbudget year 3-5 years 3-5 years

in the futurein the future3-5 years 3-5 years

in the futurein the future

Balanced Balanced budgetbudget

Balanced Balanced budgetbudget Each yearEach yearEach yearEach year On average over On average over

the business cyclethe business cycleOn average over On average over the business cyclethe business cycle

BudgetBudgetallocationallocation

BudgetBudgetallocationallocation Bottom-upBottom-upBottom-upBottom-up Top-downTop-downTop-downTop-down

Focus of Focus of controlcontrol

Focus of Focus of controlcontrol InputsInputsInputsInputs Outputs andOutputs and

outcomesoutcomesOutputs andOutputs and

outcomesoutcomes

AttentionAttentionAttentionAttention GeneralGeneralaccountaccount

GeneralGeneralaccountaccount All accounts All accounts

and fundsand fundsAll accounts All accounts

and fundsand funds

MTEF (medium-term expenditure framework)MTEF (medium-term expenditure framework)• Preparing annual budgets with a medium-term perspective in

a top-down way• Introduced in Korean in 2004 with the publication of the

National Fiscal Management Plan (2004-2008)

-24-

ConsCons

• Better able to cope with the trend increase in spending, Better able to cope with the trend increase in spending, especially when especially when annual spending ceilingsannual spending ceilings are set up and are set up and observed over the medium term (a observed over the medium term (a targettarget-based approach).-based approach).

• Stronger linkage between policy-making and budgeting.Stronger linkage between policy-making and budgeting.

• Full operation of the automatic stabilizer.Full operation of the automatic stabilizer.

• Greater autonomy in line ministries.Greater autonomy in line ministries.

• Spending projections becoming “entitlements” for line Spending projections becoming “entitlements” for line

ministries.ministries.

• Deficit bias when macro-forecasts are overly optimistic.Deficit bias when macro-forecasts are overly optimistic.

• Greater room for waste, fraud, and abuse in line ministries.Greater room for waste, fraud, and abuse in line ministries.

Pros and Cons of MTEFPros and Cons of MTEF

ProsPros

-25-

Improving the MTEFImproving the MTEF

– Performance management to be strengthened and the capacity Performance management to be strengthened and the capacity for planning and prioritizing to be improved in line ministries.for planning and prioritizing to be improved in line ministries.

– The capacity for policy analysis and macro-forecasts to be The capacity for policy analysis and macro-forecasts to be enhanced in the MPB.enhanced in the MPB.

– The medium-term targets in the MTEF to be clarified and the The medium-term targets in the MTEF to be clarified and the annual operational targets to be set out.annual operational targets to be set out.

– Various risk analysis to be introduced.Various risk analysis to be introduced.

– A mechanism for “baseline” projections to be established.A mechanism for “baseline” projections to be established.

– A reconciliation process to analyze the difference between A reconciliation process to analyze the difference between projections on fiscal aggregates and outturns to be established.projections on fiscal aggregates and outturns to be established.

– Internal auditing to be strengthened.Internal auditing to be strengthened.

– ““Program budgeting” to be introduced.Program budgeting” to be introduced.

-26-

Diverse Initiatives for Performance ManagementDiverse Initiatives for Performance Management

Performance Performance AuditAudit(BAI)(BAI)

PerformancePerformanceManagementManagement

Performance Performance ManagementManagement

System System (MPB)(MPB)

Government Government Operations Operations

Assessment Assessment SystemSystem(OGPC)(OGPC)

Self-Self-AssessmentAssessmentof Spending of Spending Programs Programs

(MPB)(MPB)

ManagementManagementby Objectives by Objectives

(MOGAHA)(MOGAHA)

-27-

• Adopting the framework in the Government Performance and Results Act (GPRA) of the U.S. federal government.

• Requires line ministries to set up performance goals and indicators for major spending programs, and prepare annual performance plans and reports.

• Has not been very successful.

• Assesses the performance and organizational capacity of ministries and citizen satisfaction with them.

• Relies mostly on the subjective assessment by outside experts and in-house staff.

• Assessment results are reported to the President in biannual cabinet meetings.

• From 2005 on,line ministries should establish performance indicators and announce target levels in annual business plans.

Performance Performance ManagementManagement

System System (MPB)(MPB)

Government Government Operations Operations

Assessment Assessment SystemSystem(OGPC)(OGPC)

-28-

• Designed after PART (Program Assessment Rating Tool) of the U.S. federal government.

• Requires line ministries to assess their own programs with spending levels above a certain threshold over a cycle of 3 years.

• The assessment is based on a series of questions asking the appropriateness of program design, program management, and performance assessment and feedback.

• MPB reviews the assessment results and takes them into account in budgeting.

• Sets annual performance targets for civil servants and reflects the results on their pay and promotion.

Self-Self-AssessmentAssessmentof Spending of Spending Programs Programs

(MPB)(MPB)

ManagementManagementby Objectives by Objectives

(MOGAHA)(MOGAHA)

-29-

– Consolidating diverse initiatives into an integrated Consolidating diverse initiatives into an integrated

system of performance management.system of performance management.

– Establishing a sound system of planning and reporting.Establishing a sound system of planning and reporting.

– Emphasis on program evaluation.Emphasis on program evaluation.

– Introducing a program structure in budget accounts.Introducing a program structure in budget accounts.

– Greater use of performance contracts.Greater use of performance contracts.

Improving Performance ManagementImproving Performance Management

-30-

Works are underway to:Works are underway to:• Redefine the Redefine the scope of “general government.”scope of “general government.” • Introduce Introduce accrual accountingaccrual accounting in financial reports. in financial reports.

– For now, For now, budgetingbudgeting in contrast to in contrast to financial reportingfinancial reporting will c will continue to be based on cash accounting in the foreseeabontinue to be based on cash accounting in the foreseeable future.le future.

• Redesign the Redesign the IT systemIT system to accommodate the changes menti to accommodate the changes mentioned above.oned above.

Budget and Accounting Reinvention Office (BARO)Budget and Accounting Reinvention Office (BARO) was formed was formed to tackle these issues in addition to the introduction of program to tackle these issues in addition to the introduction of program budgeting.budgeting.• BARO members consist of secondees from MPB, MOFE, BBARO members consist of secondees from MPB, MOFE, B

AI, etc.AI, etc.

Other Reform EffortsOther Reform Efforts

-31-

Many efforts to modernize the fiscal management system Many efforts to modernize the fiscal management system after after the crisis of 1997the crisis of 1997..• The government began the reform process on their own The government began the reform process on their own

initiatives.initiatives. Major pointsMajor points

To Summarize..To Summarize..

• Streamlining the budget structure

• Introducing the MTEF

• Strengthening performance management

• Redefining the scope of government

• Introducing accrual accounting

• Streamlining the budget structure

• Introducing the MTEF

• Strengthening performance management

• Redefining the scope of government

• Introducing accrual accounting

Aggregate fiscal discipline

Aggregate fiscal discipline

TransparencyTransparency

Allocative and technical efficiency

Allocative and technical efficiency