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MTEF/Top-down Budgeting for Korea Dong Yeon Kim The World Bank. Table of Content. Introduction of MTEF Korea’s MTEF Initiatives Issues To Be Addressed Implementation Strategy for Korea. Introduction of MTEF. Background of MTEF. Changing role of budgeting

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Presentation Transcript
table of content
Table of Content
  • Introduction of MTEF
  • Korea’s MTEF Initiatives
  • Issues To Be Addressed
  • Implementation Strategy for Korea
background of mtef
Background of MTEF
  • Changing role of budgeting

- from control (spending) to management (policy)

  • Increasing difficulty of maintaining fiscal soundness

- slowed economic growth, built-in entitlement

  • Growing demand for public spending

- aging population, education, social welfare

  • Demand for more democratized and

transparent budgeting process

objectives of mtef
Objectives of MTEF
  • Integrating policy priorities into annual budget
  • Providing mid-term perspective (3-5 yrs)

on expenditure plan

  • Enhancing operating efficiency
  • Strengthening feedback and accountability

mechanism by performance management

mtef process simplified
MTEF Process (simplified)

Updated cost

estimate of

existing

policy/program

Macro-economic forecasting

Fiscal

Target

Total Expenditure

Setting

For multi years

Sectoral Ceiling

Setting for multi years

Annual Budget

Formulation

New sectoral demand for t+2 (priority/cost)

Sectoral Budget

Preparation

international trend 1

International Trend (1)

CBO: central budget office, MoF: different part of MoF/Treasury

Source: OECD-World Bank Budget Practices and Procedures Database

international trend 2

International Trend (2)

Source: OECD-World Bank Budget Practices and Procedures Database

lessons from international experiences
Lessons from International Experiences
  • Integration of multi-year planning with annual budget

- MTEF and annual budgeting is ‘one’ process

  • Honest/realistic macroeconomic forecasting
  • Separation of total budget from detailed program
  • Clarification of new roles of MOF/line ministries
  • Capacity building and incentives for MOF/line ministries
  • Development of feedback mechanism
current budgeting in korea
Current Budgeting in Korea
  • Centralized, itemized budgeting
  • Heavy weight on bottom-up approach
  • MPB’s active involvement in program details
  • Lack of macro consideration and mid-term plan

- institutional division between MPB and MoFE

  • Fiscal reform initiatives with mixed results
track record of linking budgeting with national planning
Track-record of linking budgeting with national planning
  • Economic Planning Board (EPB), 1961-1994:

- planning and budgeting functions under one roof

  • Strong political support and leadership

- monthly President’s visit to EPB

- minister of EPB holds position of DPM

(influence over line ministry for coordination)

  • In retrospect, MTEF exercise without calling it MTEF
past fiscal reform efforts in korea
Past Fiscal Reform Efforts in Korea
  • Strengthening linkage between formulation and execution
  • Bringing in incentive system for expenditure savings
  • Piloting performance-based budgeting
  • Introducing double-entry accounting system
  • Improving aggregate expenditure control
  • Introducing ex-ante evaluation system for major projects
why mtef
Short-term Perspective with Bottom-up Approach

- Yearly based revenues and expenditures

- Weak linkage between national policy priorities and budgeting

Future Fiscal Risk

- Social welfare expenditure demands/rapidly aging population

Inefficiency from Managerial Inflexibility

- Limited autonomy to plan policy and implement budget

Why MTEF?
mtef process in korea planed

Macro Forecasting &

LTFP

Sectoral & Ministerial Ceilings

Fiscal Targeting

&

Budget Envelope

Line Ministries’ Requests

Review & Budget Document-tation

MTEF Process in Korea (planed)`

Updated Cost

Estimate

Cabinet Meeting

new budget process 1
New Budget Process (1)
  • Stage I : Macro-economic Forecasting and

Long-term Financial Management Planning

- Macro-forecasting and review of national debt levels

  • Stage II : Fiscal Targeting and Budget Envelope

- Set fiscal targets and policy, and total budget aggregate

  • Stage III : Sectoral and Ministerial Ceilings

- Decide objectives, sectoral and ministerial expenditure limits

new budget process 2
New Budget Process (2)
  • Stage IV: Cabinet Meetings
    • Agree on macro-forecasting, long-term plans, fiscal targeting, expenditure aggregates and sectoral ceilings
  • Stage V: Line Ministries’ Requests
    • Prepare budget proposal within guidelines
  • Stage VI: Review and Budget Documentation
    • Review line ministries’ requests for compliance with sectoral limits and policy priorities
how to build macro forecasting capacity in mpb
How to Build Macro Forecasting Capacity in MPB?
  • MPB plays a key role in macro forecasting

for fiscal policy purpose

- strong need to increase institutional capacity

- consideration of social/political factors

  • Coordination mechanism with MoFE, BoK,

public/private research institutes

  • Formula for conservative forecasting for budgeting

- in Canada, add 0.5-1% to forecasted interest rates

how who decide total budget sectoral ceiling 1
How/Who Decide Total Budget & Sectoral Ceiling? (1)
  • Two stage approach:

total envelope setting sectoral allocation

  • Total budget setting

- macro/fiscal targets,social/political demands

- new sectoral demands and updated costs estimates

  • Sectoral allocation

- national policy priority

- determined within total budget : zero-sum game

how who decide total budget sectoral ceiling 2
How/Who Decide Total Budget & Sectoral Ceiling? (2)
  • Final draft is prepared by MPB

in consultation with the President

  • Send draft to cabinet meeting

for consensus building

- sectoral ceiling is not revealed until total decided

- in Sweden, 2-3 days’ cabinet retreat

  • In case of disagreement,

final decision is made by President

“It is President who holds ultimate responsibility of budget”

use of budget margin
Use of budget margin
  • Serves as a Bumper for

1) macro forecasting deviations

2) ‘inevitable’‘unexpected’ demand

3) President’s new initiatives under exceptional situations

  • Budget margin

= total envelope – aggregate of sectoral ceiling

* in Sweden, 3.33% in 1997, and 0.05% in 2003

  • Unused margin to be used to accelerate debt payment
how much sectoral ceiling is binding
How much sectoral ceiling is binding?
  • In principle, no breach is allowed
  • Amendment allowed for substantial macroeconomic change (cost estimate basis)
  • Exception is explicitly identified ex-ante

with MPB’s consent, through cabinet meeting

1) ministry makes trade-off within sectoral cap

2) trade-off between ministries within total budget

3) budget margin to be used

how much discretion allowed for line ministries
How Much Discretion Allowed for Line Ministries?
  • Sectoral priority discussed and agreed

between MPB and line ministries

  • Line ministries prepare own budget request

within provided ceiling & priority line

  • MPB’s monitoring and coordination mechanism
  • Incentive for efficient spending

- allowed to carry-over certain % of savings to ministries

how to build incentive system
How to Build Incentive System?

For MPB

- Shift to higher level, macro decision-making

by integrating national policy priorities with budgeting

- Close interaction with President

For Line Ministries

- Budgetary Discretion to prioritize policies

- Flexibility in implementing policy and executing budget

how to ensure line ministries accountability 1
How to Ensure Line Ministries’ Accountability? (1)
  • Ministers hold ultimate responsibility over performance
  • MPB plays a watchdog
  • Performance management serves as a feedback

mechanism for increased discretion

  • Linking budgeting with accounting system
  • Information system needs to be integrated between

MPB, MOFE, line ministries, and NAB

how to ensure line ministries accountability 2
How to Ensure Line Ministries’ Accountability? (2)
  • Performance Management System

- utilized as information gathering and analysis

- long-term, phased approach is desirable

- need to adopt realistic short-term approach

- pilot projects to introduce output-based indicator

development and performance evaluation system

- expand into all programs with outcome indicators

how to improve budget structure and scope
How to Improve Budget Structure and Scope ?
  • Need for strong budget basics and

for simplified budgetary complexity

  • Complexity of budget structure
    • One General Account, 23 Special Accounts, 45 Funds, 2,000 appropriations, and 6,000 sub-accounts
  • Classification system emphasises input controls
  • Lacks transparency and is technically cumbersome
pre conditions for implementing mtef
Pre-conditions for Implementing MTEF
  • Strong political support
  • MPB’s willingness/commitment

- clear understanding of MTEF and incentives

- strong leadership within MPB

  • Line ministries’ compliance

- proper incentives: discretion and policy prioritization

  • Capacity building for MPB and line ministries
  • Legal framework for new roles/responsibilities
creating enabling environment for mtef
Creating Enabling Environment for MTEF
  • Use MTEF as an instrument to alter status quo
  • Fiscal reform along with PS reform
  • Leadership and Capacity Building

- champion of reform and creating core team

- motivating self-development and capacity building

  • Performance oriented environment in government

- e.g., regulation-free organizations

implementation strategy
Implementation Strategy
  • Stage I : top-down approach (Big Bang Approach)

- macroeconomic forecasting and fiscal target setting

- setting total and sectoral ceiling prior to program details

  • Stage II : bottom-up approach (Gradual Approach)

- line ministries’ discretion within sectoral ceiling and priority

- allowing discretion on operating costs

  • Stage III :incorporation with performance management

- well-functioning information system

- performance information reflected in budgetary decision

slide34
“A budget is much more than

a collection of numbers.

A budget is a reflection of

a nation’s priorities, its needs, and its promise.”