Introduction of Program Budgeting in Korea

1. Introduction of Program Budgeting in Korea June 7, 2005 Sang Dae Choi Budget and Accounting Reinvention Office(BARO) Ministry of Planning and Budget

2. - Contents- Ⅰ. The BARO and its Mission Ⅱ. Why Program Budget in Korea at this point Ⅲ. Key Factors in Designing Program Budget Structure Ⅳ. Efficient Operation of the Program Budget Ⅴ. Schedule to Introduce the Program Budget Ⅵ. Lessons and Recommendations

3. Ⅰ. The BARO and its Mission ■ National Policy Task Meeting, chaired by the President (March 4. 2004) - Reform of budget structure and system - Reform of the government accounting system - Integrated fiscal information system ■ Budget and Accounting Reinvention Office (BARO) - A government-wide task force (like JFMIP of the U.S.A.) • Ministry of Planning and Budget (MPB) • Ministry of Finance and Economy (MOFE) • Ministry of Government Administration and Home Affairs (MOGAHA) • Board of Audit and Inspection (BAI) - CPA and IT experts - Advisory committee, composed of experts from academia and the private sector 1

4. Ⅰ. The BARO and its Mission (Continued) ■ Mission : Establishment of Digital Budget and Accounting System -"Providing budget and accounting infrastructure for better strategic resource allocation and performance management" - One of the recent 4 fiscal reform agendas in Korea with • National Fiscal Management Plan (as a MTEF) • Top-down approach in budgeting • Performance Management System ■ Core Tasks - Redefining the scope of public finance - Revising the budget structure : Program Budget - Introduction of accrual accounting and double-entry bookkeeping - Establishing an integrated fiscal information system (IFIS) 2

5. Ⅱ. Why Program Budget in Korea at this point 1. Input and Control Oriented Budget System so far ■There has been a positive effect on restraining wasteful expenditures in budget. ■However, a budget system incompatible with the aims of better strategic resource allocation and performance management 3

6. 2. Barrier to Success of Fiscal Reform Agendas ■ Regarding the 5-Year National Fiscal Management Plan, - Different functional classification with annual budget ※ The plan : 14 section/56 subsection, Annual budget : 20Jang/66Kwan - No program level between 550 items and 6,000 sub-subitems ■ Also, in the process of top-down budgeting, - Absence of program level, which is critical in deciding sectoral and ministerial ceilings ■ In regard with the Performance Management System, - No budget level appropriate for performance management - Not reflect a program’s full cost - No change in line-item centered method in budget execution management and account settlement 4

7. Ⅲ. Key Factors in Designing Program Budget Structure 1. Setting up Programs to Link Budget with policy ■ Excessively detailed current activities will be consolidated and then grouped as program level, which represents policy objectives. 6

8. 1. Setting up Programs to Link Budget with Policy (continued) ■ Firstly, rearranging functional classification of expenditure budget (16 sections & 66 subsections). - Accordance of the MTEF and annual budget 7

9. 1. Setting up Programs to Link Budget with Policy (continued) ■ Secondly, simplifying excessively detailed activities to a consolidated activity that links to programs 8

10. 2. Allocation of Indirect Costs to Reflect a Program's Full Cost ■ Personnel cost and operation cost will be allocated by programs. ■This will be implemented by stages.   - In a short term, only personnel cost and operation cost of Offices and Bureaus will be allocated by relevant Offices and Bureaus’ programs. - In a long term, costs of supporting organizations within a ministry such as Planning and Management Office and Coordination Division will be allocated by relevant Offices and Bureaus' programs. 9

11. 3. Ensuring Accountability by Linking Programs with Organization ■In principle, a cross-cutting program among organizational units (ministries or offices/bureaus) will be avoided. ■ Linkage of performance and budget management by according the level of performance objective and policy program 10

12. 4. Enhancement of Autonomy in Line Ministries ■ The activities and/or projects under programs, in principle, will be managed autonomously by line ministries. - The sectoral and ministerial expenditure ceilings will be decided on the basis of programs. ■ Furthermore, the line-items will be greatly reduced. (49 divisions → less than 10 divisions) - The tentative divisions • Personnel costs                     • Acquisition of capital assets • Operation costs                     • Capital transfers • Current transfers                    • Other payments - The compartments between divisions will be minimized while compartments will carry out the role of the cost element in resource allocation, rather than input control. 11

13. 5. Improvement of Budget and Accounting Documents ■ Formats and contents of budget and accounting documents show philosophy of a country on its fiscal management. - Line-item & control centered → Program & performance centered ■ Uplifting range and quality of budget information - A program budget document to consolidate resources such as budget and public funds. - From figure-oriented to programs information-oriented ■ Regarding account documents, - The results of cash-based budget execution, as program and activity standard from the current line-item centered - Additionally, accrual-based consolidated financial reports such as a report on fiscal status and a fiscal operation report by programs, will be provided separately. 12

14. Ⅳ. Efficient Operation of the Program Budget 1. Role Changes of Line Ministries and Fiscal Authorities 13

15. 2. Budget Process Changes focused on Programs 14

16. Ⅴ. Schedule to Introduce the Program Budget 15

17. Ⅵ. Lessons and Recommendations < Program Budget Design > √ Grand picture and sequence among fiscal reform agendas √ Feasible guidelines on the program budget structure and operation, which can be practically implemented within line ministries √ Active participation of line ministries from the beginning stage of designing the program budget structure < Implementation Strategies > √A steering government-wide task force √ Strong back-up from the political and government-wide leadership √ Consensus building with the National Assembly and the NGOs √ Education and training for budget people of line ministries 16