Successful Installation of MTEF in the Korea’s Fiscal System

1. Successful Installation of MTEF in the Korea’s Fiscal System Seok-Kyun Hur Korea Development Institute March 15, 2004

2. Motivation • Address the necessity of Medium Term Expenditure Framework : Why we need it • Discuss general features of MTEF: How it works • Specific modules of MTEF to consider

3. October Authorized by the cabinet and the president, the draft budget is sent to the National Assembly by October 2nd. In mid-October, the Committee on Budget and Accounts begins deliberation on the draft budget. Ministers are typically requested to testify at committee meetings. Meetings are normally open to the public. Month Action March The Ministry of Planning and Budget (MPB) sends the Guide to Budget Compilation to spending ministries. December The draft budget is modified and approved by the Committee on Budget and Accounts and then by the National Assembly by December 2nd. May Ministries send budget bids to MPB by the end of May. June-July MPB compiles the budget bids and prepares a preliminary budget proposal. August- September MPB goes through bilateral negotiations with spending ministries between mid- August and mid-September. MPB discusses the budget proposal with the ruling party. Budget Time Table in Korea

4. Current Fiscal System in Korea • Cons • Lack of medium-term strategic perspectives • Excessive reliance on the bottom-up approach • Pros • Emphasizing input control and regularity of budget execution • Low Debt level

5. Purposes of MTEF • Fiscal Sustainability • Efficiency enhancement of public resource allocation • Strengthening fiscal management system

6. Players • Budgeting Authority • Fiscal Sustainability and Efficiency of cross-sectoral resource allocation • Line Ministries (Local Governments) • Production efficiency (cost minimization) and Quantity maximization • Public • Heterogeneous in existing time time and preference

7. Roles Compiles budget bids and prepares the draft budget. Allocates funds to spending ministries. Prepares revenue forecasts Releases cash to spending ministries. Manages the treasury single account in the Bank of Korea. Issues government bonds and manages assets and liabilities. Prepares the whole-of-government financial reports and produces government financial statistics. Checks the regularity of ministrial activities. Prepares audit reports. Deliberates and votes on the budget and reviews audit reports. Execute the budget and prepare financial reports. Major Players in Korea’s Budget Process Players Ministry of Planning and Budget (MPB) Tax and Customs Office of the Ministry of Finance and Economy (MOFE) Treasury Bureau of MOFE Board of Audit and Inspection (BAI) National Assembly Spending ministries

8. Domain of Decision-making • Cross-time Allocation: Fiscal Sustainability • Cross-Sectoral Allocation: Burden of proof to line ministries • Cross- state Diversification: Burden of financial risks to the Budgeting Authority

9. MPB Global Ceiling Total Revenue

10. t t+3 t+2 t+1 Cross-Time Procedures of MTEF C A B

13. Specific Considerations • Coverage of MTEF • Entire Consolidated following GFS

14. Current balances are over-stated due to the surpluses in the National Pension Fund (NPF). To assess the financial soundness correctly, NPF surpluses should be subtracted from the consolidated balance.

15. On the other hand, net lending tends to make the consolidated balance under-stated since the default rate on government loans are very low. We therefore adjust the balance upward by the amount of net lending.

16. Specific Considerations • Time Horizon of MTEF • Choice between Predictability and Credibility

17. Specific Considerations • Macroeconomic Forecasting • Horizon • An organization in charge of economic outlook • Application of forecasted figures to MTEF

18. Specific Considerations • Balance of Top-down and Bottom-up • Top-Down: information flows on macroeconomic forecasts and national priorities, broadly itemized budget allocation and risks of performance • Bottom-up: information flows on performance measurement and demand or social need for specific public good and risk of budgeting and debt management • These duplex exchanges of information and resources are made at legally set(or publicly guaranteed) opportunities.

19. Specific Considerations • Categories of Spending in MTEF • Accommodate a Matrix structure of budget classification and accounts • The importance of coordination and communication among the line ministries participating in a similar fiscal activity

20. Specific Considerations • Setting a global ceiling and sectoral ceilings • Who sets the ceilings • What factors determines the ceilings? • Application of forecasted figures to MTEF: Extra Prudence • Time Consistency of Ceilings • Flexible VS. Inflexible • Dual standards for a global ceiling and sectoral ceilings

21. Specific Considerations • Performance Based Budgeting and MTEF • Feedback cycle • Difficulty in inter-program performance comparison(critical in setting the priorities) • Performance Measures for MTEF • Fiscal sustainability • Enhancing the allocative efficiency

22. Concluding Remarks • Budgeting process as a collective action game • Rule-based pseudo market allocation • MTEF as a precautionary measure