Fiscal Reform in Korea: Top-Down Budgeting Implementation

1. MTEF Implementation in Korea - Top-down Budgeting - Soo Min Park Ministry of Planning and Budget

2. 1. The Starting Point of Reform 2. The Vision of MPB 3. What Lies Ahead

3. 1. The Starting Point of Reform

4. Why did MPB look for a new resource allocation system? Fiscal Crisis • However “Earlier the better” • Potential issues to be addressed ( populating ageing, unification costs… ) No • Stiff portfolio in macro & micro levels • - economic sector : over 20% for 30 year • - large spending but unsatisfactory improvement in some sectors Yes Efficiency of Public Expenditure Yes Fiscal Transparency • 22 special accounts and 59 public funds • “highly fragmented and compartmentalized” (OECD)

5. Weaknesses in the present fiscal system • Too much work load on MPB from reviewing • individual programs ( 6,000 or more ) • Little time for macro analysis Bottom-up Oriented Budgeting • Lacks long-term perspectives, Incremental budgeting • Little consideration on business cycle Yearly Budget Central Fiscal Authority-led • Insufficient role of line ministries, field expertise is not absorbed into the budgeting process • Asymmetry of information on cost between MPB and line ministries

6. 2. The Vision of MPB

7. Yearly Budget Bottom-up Oriented Budgeting Central Fiscal Authority-led Where do we want to go? Top-down Budgeting ( Strategic Resource Allocationbased on Macro Analysis ) Med-Term Expenditure Framework Cooperation and Role Sharing between MPB and Line Ministries

8. Y+5 Y+1 Y+1 The Korean Model (still evolving…) (Jun~Aug) ( Mar~May ) MPB Line Ministries As is Budget Requests ( by programs ) Budget Formulation ( program-oriented ) (Jun~Aug) (Jan~Apr) (Apr~Jun) (Apr) To be Line Ministries MPB MPB Cabinet Meeting Consultation and Review Budget Formulation Within Ceilings Medium- Term Plan  Total Ceiling  Sectoral Ceilings

9. Stage 1 : Establishing Medium-Term Plan ( National Fiscal Management Plan ) “ Supporting Strategic National Management ” • Analyzes 5-year Fiscal Balance & • Total Expenditure Levels • - Gives way to Medium-term Budget Balance • Sets National Policy Goals & Priorities • for resource allocation • Proposes Sectoral and Ministerial Ceilings • & Major National Projects

10. Stage 2 : CabinetMeeting “ Melting pot of Policies Making and Resource Allocation ” • In-depth Discussions on Sectoral & Ministerial Ceilings • 5-year fiscal targeting • Resource allocation by national priorities • Review Major Policies upon Future Resource Allocation Projection • Based on MPB Proposal

11. Stage 3 : Line Ministries’ Budget Formulation “ Change of Role and Mindset ” • Autonomous Resource Allocation within Ceilings • Own priorities by sectors • Using field expertise in budgeting • Yearly  5 years • MPB’s Stand Alone Decision-making→ All the Line Ministries’ Decision-making • Provides “ Budget Formulation Manual ”

12. Stage 4 : MPB’s Consultation & Review “ Player  Coordinator ” • Reviews Spending Plans of Line Ministries • Decisions from the Cabinet Meeting • Conformity to the Formulation Manual • Reflects Changes after Cabinet Meeting • Macro Variables, unexpected issues …

13. 3. What Lies Ahead

14. What are we expecting? ( The Starting Point ) FiscalSoundness • Long-term Perspective • Symphony of Sustainability & Economic Stabilizing Efficiency ofPublicExpenditure • Macro Analysis → Strategic Resource Allocation • Role Sharing → Self Expenditure Restructuring • Cost Information Sharing → Extinction of Excessive Budget Request ( 20∼190% Increase ) FiscalTransparency • A new Consolidated Structure over special accounts and public funds

15. The road ahead… • Not enough long-term fiscal forecasting background • Early stage ofPerformance Management System • Potential difficulties in gaining consensus of the National Assembly

16. Gradualintroduction • Maintaining strong fiscal discipline • Surpassingglobal standards Our roadmap… 2003 2008 2004 Planning & Design Full establishment Introduction Adjustment

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