Introduction to MTEF in Korea

1
Introduction to MTEF in Korea

• Doyoung Min
• The World Bank

2
Public Expenditure

• Public Expenditure Analysis (PEA)
• What is to be done
• Public Expenditure Management (PEM)
• How it is to be done

3
Public Expenditure Analysis

• The role of the state
• Public spending and budget deficit
• Efficiency
• Equity
• Fiscal decentralization

4
Public Expenditure Management

• MTEF
• Linking policy, planning and budgeting
• Performance management
• Integrated Financial management information
  system (IFMIS)
• Fiscal transparency

5
Medium-Term Expenditure Framework
6
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

7
Objectives of MTEF

• Integrating national policy priorities
• into annual budget
• Providing medium-term perspective
• on expenditure plan
• Enhancing operating efficiency with increased
• LMs discretion over their spending
• Strengthening feedback and accountability
• mechanism by performance management

8
International Experiences (1)
Coverage of MTEF Responsibility of economic assumption Multi-year cost estimate for new spending
Sweden 3 yrs MOF All spending items
UK 5 yrs CBO All spending items
Australia 4 yrs CBO All spending items
NZ 2 yrs MOF All spending items
Netherlands 4 yrs CPB All spending items
Norway varying MOF No
USA N/A N/A All spending item
MOF different part of MOF/Treasury, CBO central
budget office, CPB Central Planning
Bureau Source OECD-World Bank Budget Practices
and Procedures Database
9
International Experiences (2)
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
UK MTEF MOF No
Australia MTEF Cabinet No
NZ MTEF Cabinet No
Netherlands MTEF Cabinet Yes
Norway N/A Cabinet Yes
USA Suggestion only President Yes
Source OECD-World Bank Budget Practices and
Procedures Database
10
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/LMs
• Development of feedback mechanism

11
MTEF in Korea
12
Budgeting in the Past

• Centralized and itemized budgeting
• Input control
• High reliance on bottom-up approach
• MPBs deep involvement in program budgeting
• Lack of macro perspectives
• Separated, individual fiscal initiatives

13
Past Fiscal Reform Efforts

• Strengthen linkage between formulation
• and execution
• Bring in incentive system for expenditure savings
• Pilot performance-based budgeting
• Introduce double-entry accounting system
• Improve aggregate expenditure control
• Introduce ex-ante evaluation system
• for major projects

14
Recent Fiscal Reform Initiatives

• 2003 Design and preparation of PEM reform
• NFMP, Top-down, Performance management
• 2004 Implementation of a series of fiscal reform
  initiatives
• National Fiscal Management Plan
• covers 5 years on a rolling basis
• includes General account, Special accounts, and
  Funds
• Top-down budgeting
• MPB gives sectoral ceilings to LMs
• Performance management
• Program budgeting
• Digital budget and accounting system
• 2005 Strengthen the link among reform
  initiatives
• FY06 budget prepared through new PEM system

15
Koreas MTEF

• NFMP Top-down
• Benchmarked Swedish model
• MPBs initiatives / Champion
• Track-record Economic Planning Board (1961-1994)
• planning and budgeting functions reside under one
  roof
• Strong leadership (President) was backed up
• Lack of Parliaments participation

16
New Budget Process (1)

• Stage I Macroeconomic Forecasting and
  Long-term Fiscal Management Planning
• Forecast macro variables for fiscal policy
  purpose
• Consider social, political and international
  factors
• Strengthen MPBs role
• consult with MOFE, Bank of Korea and
• public/private research institutes
• strengthen MPBs capacity of macroeconomic
  analysis and institutional coordination

17
New Budget Process (2)

• Stage II Fiscal Targeting, Budget Envelope, and
  Sectoral Allocation
• Fiscal targeting based on macro variables and
  policy objectives
• Set out budget envelop with updated cost
  estimates
• Sectoral allocation according to national policy
  priority, previous years performance
  information, and unexpected events
• Sectoral categories vary by country
• Sweden(27), Canada(10), Norway(by Ministry)

18
New Budget Process (3)

• Stage III Cabinet Meetings
• Prepared by MPB in consultation with President
• Budget envelop
• Sectoral ceiling
• Major national policies
• 2-day Cabinet meeting for consensus building
• (held on April 30 and May 1 for FY06 budget)

19
New Budget Process (4)

• Stage IV Line Ministries Requests
• Line ministries prepare budget request within
  provided sectoral ceiling
• In line with sectoral policy priority
• Increased discretion
• MPB guidelines for formulating budget proposal
• Tools for consistent budget presentation,
  analysis, statistics
• Gradual phase-out of interventional aspects

20
New Budget Process (5)

• Stage V Review and Documentation
• MPB reviews LMs budget request
• checking the sectoral ceiling
• examine programs according to agreed sectoral
  priorities
• MPBs active interaction with line ministries
• Sufficient involvement of the President
  in budgeting process

21
MTEF Process
Total Expenditure Setting For multi years
Macro-economic forecasting
Sectoral Ceiling Setting for multi years
Fiscal Target
Annual Budget Formulation

• Updated cost
• estimate of
• existing
• policy/program

Sectoral Budget Preparation
New sectoral demand for t2 (priority/cost)
22
Changes Made

• Medium-perspective on expenditure framework
• NFMP annual budgeting
• Focus on Performance Management
• Created Performance bureau
• Organizational Restructuring
• Matrix Function and Sector
• Strengthened Strategic Planning role
• Address budgetary basics
• Budget and Accounting Reinvention Office
• Introduce Program budgeting
• IFMIS

23
Challenges Remained (1)

• Integration of NFMP to annual budget
• Annual budget should be the first year budget of
  NFMP
• Macro-forecasting capacity
• MPBs internal capacity building
• Cooperation between MPB and MOFE
• Bank of Korea, research institutes
• International cases UK, Sweden, and France

24
Challenges Remained (2)

• Players willingness and commitment
• Understanding of PE and MTEF
• MPBs proper guideline for LMs
• Identification of new roles
• Autonomy and Accountability MPB and LMs
• Change of organizational culture in addition to
  organizational restructuring
• Performance-oriented
• Comprehensive government reform including
  civil service system