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Linking Policy, Planning and Budgeting : Korean Experience and Challenges February 7, 2007

Linking Policy, Planning and Budgeting : Korean Experience and Challenges February 7, 2007 Kang Ho Lee ( klee21@mpb.go.kr ) Director, Growth Strategy Division Ministry of Planning and Budget Republic of Korea. 1. Background of Fiscal Reforms in Korea.

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Linking Policy, Planning and Budgeting : Korean Experience and Challenges February 7, 2007

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  1. Linking Policy, Planning and Budgeting : Korean Experience and Challenges February 7, 2007 Kang Ho Lee (klee21@mpb.go.kr) Director, Growth Strategy Division Ministry of Planning and Budget Republic of Korea

  2. 1. Background of Fiscal Reforms in Korea • Forecasting on additional spending in the future • Need extra resources, 1,100 trillion won for vision 2030 • Reallocation of expenditure between economic and social welfare resulted in aging and polarization problems • social welfare as % of total expenditure : 9.9% (1980) → 25.2% (2005)  40.0% (2030) • % of the population over 65: 7.2% (2000)  14.4%(2019) 24.1%(2030) • Increasing national debts after 1997’s Korean financial crisis • % of GDP : 12.3(1997)  23.0(2003)  33.4(2006) • Need to enhance the efficiency in public spending

  3. System Performance Management Top-down Budgeting Program Budget Legal Frame- work National Fiscal Act in 2006 National Fiscal Management Plan Increased efficiency Enhanced linkage Operation Building an advanced Public Expenditure Management System 2. Framework of Major Fiscal Reforms

  4. Overall Scheme Vision Korea: New Stride of Hope for New Opportunities Goals Innovative, vibrant Economy Safe, equitable Society Stable, posed Nation Strategy Maintaining Growth Momentum UpgradingHuman Resources New Social Capital All-out Globalization Advanced Social Welfare System Vehicles VisionAction Plan ProactiveInvestment Institutional Reforms Overall Scheme of Vision 2030

  5. 50.0 welfare 40.0 30.0 20.0 10.0 Economy 0.0 2005 1980 1990 2000 2010 2020 2030 ratio of budget The Change of Resource Allocation in Vision 2030 • Increase of social welfare expenditure in the budget • : 9.9% (1980)  25.2% (2005)  40.0% (2030) • Decrease of economic spending in the budget • : 26.0% (1980)  19.9% (2005)  10.0% (2030)

  6. 3. Linking Budget to Plans 3-1. NFMP(MTEP) • Discordance of 2007 budget between ’06~’10 NFMP and’04~’08 NFMP • Difference of total expenditures : 1.8% • Difference of Revenue : 4.4%

  7. 3-2. Performance Management System • Establishment of an ex-post control system that reflects the performance in budgeting • 1/3 of budgetary programs are evaluated and reflected

  8. 3-3. Program Budgeting • Program budget is a critical “building block” to link NFMP, Top-down budgeting, and PMS in a wholeProcess • For NFMP: provide program initiatives to represent medium-term national priorities • For Top-down Budgeting: provide the consultative bases to decide expenditure ceilings between line ministries and MPB • For Performance Management System: provide the units to link resources and results

  9. Bottom-up : expenditure of program A goes to T, • and spending of program B goes to TR • Top-down : expenditures of program A and B go to 2 times ß ￣ BudgetRange 3-4. Top-down Budgeting(1)

  10. <Attach1> Theoretical background of Top-down budgeting(1) • Basic Hypothesis • Cost function • Utility function of line ministry • Scale of budget • Net value • Total Value

  11. <Attach2> Theoretical background of Top-down budgeting(2) • Incentive compatibility(IC) and Individual rationality(IR) • Maximized condition • Optimized budget

  12. 3-4. Top-down Budgeting(2) • Enhancing accountability of line ministries • Actual case of Bottom-up → Top-down : • Ministry of Maritime Affairs and Fishery

  13. 4. Challenges to Performance Management System(1) • Low incentives from performance evaluation • Too focused on the adequate category (85% of 2007 budget) • Difference between evaluating year and reflecting year • Difficulties in building effective evaluation index

  14. 4. Challenges to Program Budget (2) • Align the annual budget classification with the classification in the NFMP • Keep programs within the organizational structure • Combine all activities according to program objectives regardless of revenue sources • Simplify the grouping of object levels

  15. 4. Challenges to MTEF andTop-down Budget (3) • Time constraint on the MTEF • How to meet expenditure ceilings • Mainly focused on the next year budget • Unit in setting expenditure ceilings : program or subsection • How to harmonize the top-down budget and deliberation process

  16. Bottom-up Top-down Ex) Behavior Changes in RequestingBudget from Line Ministries

  17. Thank You

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