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Introduction to MTEF in Korea

Introduction to MTEF in Korea. Doyoung Min The World Bank. Public Expenditure. Public Expenditure Analysis (PEA) “What” is to be done Public Expenditure Management (PEM) “How” it is to be done. Public Expenditure Analysis. The role of the state Public spending and budget deficit

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Introduction to MTEF in Korea

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  1. Introduction to MTEF in Korea Doyoung Min The World Bank

  2. Public Expenditure • Public Expenditure Analysis (PEA) • “What” is to be done • Public Expenditure Management (PEM) • “How” it is to be done

  3. Public Expenditure Analysis • The role of the state • Public spending and budget deficit • Efficiency • Equity • Fiscal decentralization

  4. Public Expenditure Management • MTEF • Linking policy, planning and budgeting • Performance management • Integrated Financial management information system (IFMIS) • Fiscal transparency

  5. Medium-Term Expenditure Framework

  6. 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

  7. Objectives of MTEF • Integrating national policy priorities into annual budget • Providing medium-term perspective on expenditure plan • Enhancing operating efficiency with increased LMs’ discretion over their spending • Strengthening feedback and accountability mechanism by performance management

  8. International Experiences (1) MOF: different part of MOF/Treasury, CBO: central budget office, CPB: Central Planning Bureau Source: OECD-World Bank Budget Practices and Procedures Database

  9. International Experiences (2) Source: OECD-World Bank Budget Practices and Procedures Database

  10. 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/LMs • Development of feedback mechanism

  11. MTEF in Korea

  12. Budgeting in the Past • Centralized and itemized budgeting • Input control • High reliance on bottom-up approach • MPB’s deep involvement in program budgeting • Lack of macro perspectives • Separated, individual fiscal initiatives

  13. Past Fiscal Reform Efforts • Strengthen linkage between formulation and execution • Bring in incentive system for expenditure savings • Pilot performance-based budgeting • Introduce double-entry accounting system • Improve aggregate expenditure control • Introduce ex-ante evaluation system for major projects

  14. Recent Fiscal Reform Initiatives • 2003: Design and preparation of PEM reform • NFMP, Top-down, Performance management • 2004: Implementation of a series of fiscal reform initiatives • National Fiscal Management Plan • covers 5 years on a rolling basis • includes General account, Special accounts, and Funds • Top-down budgeting • MPB gives sectoral ceilings to LMs • Performance management • Program budgeting • Digital budget and accounting system • 2005: Strengthen the link among reform initiatives • FY06 budget prepared through new PEM system

  15. Korea’s MTEF • NFMP + Top-down • Benchmarked Swedish model • MPB’s initiatives / Champion • Track-record: Economic Planning Board (1961-1994) • planning and budgeting functions reside under one roof • Strong leadership (President) was backed up • Lack of Parliament’s participation

  16. New Budget Process (1) • Stage I : Macroeconomic Forecasting andLong-term Fiscal Management Planning • Forecast macro variables for fiscal policy purpose • Consider social, political and international factors • Strengthen MPB’s role • consult with MOFE, Bank of Korea and public/private research institutes • strengthen MPB’s capacity of macroeconomic analysis and institutional coordination

  17. New Budget Process (2) • Stage II : Fiscal Targeting, Budget Envelope, and Sectoral Allocation • Fiscal targeting based on macro variables and policy objectives • Set out budget envelop with updated cost estimates • Sectoral allocation according to national policy priority, previous year’s performance information, and unexpected events * Sectoral categories vary by country Sweden(27), Canada(10), Norway(by Ministry)

  18. New Budget Process (3) • Stage III : Cabinet Meetings • Prepared by MPB in consultation with President • Budget envelop • Sectoral ceiling • Major national policies • 2-day Cabinet meeting for consensus building (held on April 30 and May 1 for FY06 budget)

  19. New Budget Process (4) • Stage IV: Line Ministries’ Requests • Line ministries prepare budget request within provided sectoral ceiling • In line with sectoral policy priority • Increased discretion • MPB’ guidelines for formulating budget proposal • Tools for consistent budget presentation, analysis, statistics • Gradual phase-out of interventional aspects

  20. New Budget Process (5) • Stage V: Review and Documentation • MPB reviews LMs’ budget request • checking the sectoral ceiling • examine programs according to agreed sectoral priorities • MPB’s active interaction with line ministries • Sufficient involvement of the President in budgeting process

  21. MTEF Process 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

  22. Changes Made • Medium-perspective on expenditure framework • NFMP + annual budgeting • Focus on Performance Management • Created Performance bureau • Organizational Restructuring • Matrix: Function and Sector • Strengthened Strategic Planning role • Address budgetary basics • Budget and Accounting Reinvention Office • Introduce Program budgeting • IFMIS

  23. Challenges Remained (1) • Integration of NFMP to annual budget • Annual budget should be the first year budget of NFMP • Macro-forecasting capacity • MPB’s internal capacity building • Cooperation between MPB and MOFE • Bank of Korea, research institutes • International cases: UK, Sweden, and France

  24. Challenges Remained (2) • Players’ willingness and commitment • Understanding of PE and MTEF • MPB’s proper guideline for LMs • Identification of new roles • Autonomy and Accountability: MPB and LMs • Change of organizational culture in addition to organizational restructuring • Performance-oriented • Comprehensive government reform including civil service system

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