1 / 29

Top-down Budgeting

Top-down Budgeting. A Tool for Central Resource Management December 15, 2006. 2006 OECD Asian SBO. Korea Institute of Public Finance John M Kim, PhD jhrv@kipf.re.kr. Outline. What is it? Why do it? How to do it? Caveats. What is Top-down Budgeting?. It is not: Bottom-up Budgeting

jesse
Download Presentation

Top-down Budgeting

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Top-down Budgeting A Tool for Central Resource Management December 15, 2006 2006 OECD Asian SBO Korea Institute of Public Finance John M Kim, PhD jhrv@kipf.re.kr

  2. Outline • What is it? • Why do it? • How to do it? • Caveats

  3. What is Top-down Budgeting? • It is not: Bottom-up Budgeting • Traditional way of budgeting • Sum of ministry budgets  Total budget • Difficult to control aggregates (total budget, deficit) • Difficult to control allocation among major sectors • Defense vs. pollution control vs. infrastructure, etc. • Additional Problems • Focus on annual numbers (myopic) • Inefficient process • Iterative negotiations (game-playing & adjusting for totals) • Inability to utilize ministries’ expertise

  4. What is Top-down Budgeting? (2) • It is:Budgeting in 2 Steps • Ceilings (aggregate numbers) • Decide total spending & deficit levels (agg. ceiling) • Decide allocation among major policy areas (sectoral ceilings: about 30) • Defense vs. pollution control vs. infrastructure, etc. • Intra-sectoral allocations (details) • Ministry/agency budgets

  5. What is Top-down Budgeting? (3) • It is:ADivision of Roles/Responsibilities • Ceilings (aggregate numbers) • Final decision by PM & Finance Minister • Focus on • Aggregate fiscal management • Medium-term perspective (multi-year ceilings) • Policy priorities • Intra-sectoral allocations (details) • Ministries formulate their own budgets • But must follow rules

  6. What is Top-down Budgeting? (4) • It is: • Effective for fiscal consolidation • A key tool for enforcing MTEF (NFMP) decisions (ceilings are often multi-year limits) • Ensures spending is aligned with priorities • Efficient in time and effort • Utilizes ministries’ expertise

  7. Outline • What is it? • Why do it? • How to do it? • Caveats

  8. Urgency of Reform? • Huge deficits ca.1990 in many OECD countries forced them to adopt major fiscal reforms

  9. Different Motivation for Korea • Top-down adopted as key part of 4 fiscal reforms • Need for longer-term perspective Anticipate need for controlling future spending growth in social welfare, etc. • Efficiency • Need to focus on broader policy priorities • Eliminate unproductive games in budget negotiations • Utilize ministries’ expertise • Need to focus on performance management, rather than controlling inputs

  10. (What are Korea’s 4 Reforms?) • National Fiscal Management Plan • Medium-term (5-year) fiscal plan for 14 sectors • Top-Down budgeting • Tier 1: Fixed spending envelope for each sector/ministry • Tier 2: Autonomy for line ministries in own budgets • Performance Management • Assess performance of spending programs • Enhance link between performance and budget • Digital Budget and Accounting System • Program Budgeting • Accrual Accounting • Computerization of accounting system

  11. (Why the 4 Reforms?) • Anticipate fiscal difficulties driven by aging & other socioeconomic changes • Population aging and low fertility rate • Old population (65 and above): 7.2 (2000)  14.4(2019) • Total fertility rate: 6.0(1961)  2.1(1982)  1.19(2003) • Less workers must support welfare of more elderly people Public pensions and health care financing will suffer most • Society demands better quality of life (social welfare, education, culture, environment) • Economic growth slowing down  so will tax revenues • Emphasis on participation and transparency • Spending growth may outrun revenue increase, so try to get fiscal system in good shape before it’s too late

  12. (Some Background: Current Fiscal Status) • Up to the financial crisis, Korea’s public finances were solid, thanks to two decades of balanced budgeting • Some deterioration resulted from coping against crisis (national debt more than doubled), but fiscal situation remains better than most other OECD countries What does this mean for the 4 Reforms? • Korea’s reforms are not driven by an immediate crisis, but this may end up somewhat undermining the momentum of the reforms

  13. Top-down vs. Bottom-up Comparison of Bottom-up & Top-down Approaches

  14. Top-down vs. Bottom-up (2) • Top-down and bottom-up methods are complementary • Information for evaluating new initiatives • Program reviews for monitoring programs/activities Approaches to Determining Expenditure Ceilings ○: actively used, △ : used as reference, - : not used

  15. Results? • No more excessive budget requests • Increase rate of budget requests in the general account dropped significantly: 30.8%(’04)  11.7%(’05)  7.0%(’06) • Self-initiated restructuring of spending by line ministries • Restructuring of multi-year programs and introduction of new programs have nearly doubled

  16. Outline • What is it? • Why do it? • How to do it? • Caveats

  17. Example of Linking Multi-year Plans to the Annual Budget (Sweden)

  18. Y+5 Y+1 Y+1 Budget Formulation in Bottom-up vs. Top-down Systems • Strategic resource allocation emphasized Line Ministries MoF Budget Requests ( by line items) Budget Formulation (line item-oriented) Before Cabinet Meeting MPB Line Ministries MoF Consultation and Review Budget Formulation Within Ceilings  Total Ceiling  Sectoral Ceilings NFMP Now

  19. Determining Expenditure Ceilings • Overall Ceiling • Prudent Economic Assumptions (Growth, etc.) • Sensitivity analysis • Independent panel or private sector forecasting • Built-in bias for lower growth rate • Fiscal Rules for Good Discipline • Sweden: structural surplus of 2% GDP • Chile: Structural surplus of 1% GDP • UK: Balance current budget over econ. cycle • Surplus automatically goes to repaying debt

  20. Determining Expenditure Ceilings (2) • Sectoral Ceilings • Must not affect overall ceiling • Usually overlaps with ministerial boundaries (good program budget design) • New initiatives may be required to be funded from savings from existing programs

  21. Determining Expenditure Ceilings (3) • Operating/Capital Ceilings • Ministries tend to favor operating expenses • Denmark: separate ceilings for current & capital expenses • Sub-ceiling for salaries/wages in operating ceiling • UK • Current expenses: Golden Rule • Capital expenses: Sustainable Investment Rule

  22. Determining Expenditure Ceilings (4) • Number of Ceilings • Korea (200+) vs. Sweden (27) • Optimal number is around 30 • More ceilings make budgeting decisions politically difficult • Need to give ministries room to exercise autonomy to ensure their proactive participation • This means Budget Office needs better tools: • Performance management • Information system to monitor execution • Enhanced analytical capacity for policy assessment

  23. Determining Expenditure Ceilings (5) • Buffers against Contingencies • Built-in buffers in prudent forecasts  Windfalls (repay debt, tax cut, etc.) • Budget Margin • Overall Ceiling = Sect. Ceilings + Budget Margin • Covers unexpected changes (forecasts errors, etc.) and institutional reforms after ceilings were fixed • Usually does not cover new policy initiatives

  24. Determining Expenditure Ceilings (6) • Expenses in or excluded from ceilings? • Discretionary expenses usually included • Mandatory expenses (social security entitlements, etc., mandated by law) • Sweden, Korea, Chile, Netherlands: included • Canada, Denmark: excluded • Interest on debt • Sweden, Denmark: excluded • Chile, Netherlands, Korea: included

  25. Determining Expenditure Ceilings (7) • Funding for new policy initiatives • Sweden: must come from existing ceilings • Most countries have review process to judge new initiatives  adjust ceilings • Australia, Canada: Cabinet committees • Netherlands, Denmark: simply verify fit with coalition agreement • Chile: pooled “Bidding Fund” from savings on obsolete or poorly performing programs

  26. Outline • What is it? • Why do it? • How to do it? • Caveats

  27. Conditions for Top-down Budgeting • Good monitoring system to compensate for delegation of authority to ministries • Performance & program reviews • Information system to monitor execution • Enhanced policy capacity + Behavioral change • Budget Office: better forecasts & projections, must be able to defend fiscal rules, but work better “together” with line ministries • Ministries: need to learn internal allocation decisions • Strong PM & Finance Minister • Commitment to rule-based budgeting (Fiscal Rules) • Remove arbitrariness in budgeting decisions, but leave room for flexibility and judicious discretion/autonomy • Support from the legislature

  28. Remaining Tasks (Korea) • Areas for improvement • Consensus and understanding on the top-down system • Ex-ante consultations with line ministries when setting spending ceilings • Further expansion of autonomy at line ministries • Insufficient preparation and guidelines by MPB • Future plans • Surveys and consultations with line ministries • Sectoral and ministerial spending ceilings set after sufficient discussions • Active use of performance assessments to restructure spending programs • Detailed budget formulation guidelines

  29. This ends the presentation Thank You!

More Related