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Medium-term Expenditure Framework - with Korea’s experience - Doyoung Min The World Bank Public Financial Management Workshop, Vientiane, Laos, May 23-26,

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Presentation on theme: "Medium-term Expenditure Framework - with Korea’s experience - Doyoung Min The World Bank Public Financial Management Workshop, Vientiane, Laos, May 23-26,"— Presentation transcript:

1 Medium-term Expenditure Framework - with Korea’s experience - Doyoung Min The World Bank Public Financial Management Workshop, Vientiane, Laos, May 23-26, 2005

2 2 PE in World Bank Objectives of PE –A critical ingredients in a country’s development –Poverty alleviation and creating an enabling environment for the private sector PE issues in World Bank –In the WB matrix, PE covers every region and various sectors such as Public Finance and PREM –Public expenditure issues touch on virtually every aspect of the World Bank’s work

3 3 Public Expenditure Public Expenditure Analysis (PEA) –“What” is to be done Public Expenditure Management (PEM) –“How” it is to be done

4 4 Public Expenditure Analysis (1) The role of the state –Market failure and distributional inequity  Government intervention –Improving efficiency of economy/distribution of income * Government failure vs. Market failure Public spending and budget deficit –How is the deficit measured? –What is the composition of deficit financing? –What is the sustainable amount of fiscal deficit?

5 5 Efficiency –Appropriate instrument for public intervention –Fiscal costs associated with public intervention –Impact of public intervention Equity –What are key distributional objectives of PE? –How PE best meet these objectives? –How assess welfare impacts of PE? Fiscal decentralization (Fiscal Federalism) Public Expenditure Analysis (2)

6 6 Basic Objectives of Public Expenditure Management Level 1: Aggregate Fiscal Discipline (Budget totals as the result of explicit, enforced decisions) Level 2: Allocative Efficiency (Expenditure according to government priorities and effectiveness of public programs) Level 3: Operational Efficiency

7 7 Key components of PEM MTEF –Linking policy, planning and budgeting Performance management Integrated Financial management information system (IFMIS) Fiscal transparency

8 Medium-Term Expenditure Framework

9 9 What is an MTEF? Conceptual framework for public finance systems –ties together multiple technical reforms –gives paradigm for understanding import of technical reforms Process, not only components of PEM systems –process of government decision-making –Multi-year emphasis Emphasizing policy –steering versus rowing for senior officials, organizations –linking policy, inputs, outputs, objectives Effort to change paradigm of actors in system

10 10 Objectives of MTEF Improve macrofiscal situation –lower deficits, improved economic growth –more rational approach to retrenchment and economic stabilization Improve impact of Government policy –link between government priorities/policies and government programs Improve program performance/impact –Shift bureaucracy from administrative to managerial culture Managerial flexibility & innovation: lower cost/output; greater effectiveness of programs/policies –Improved resource predictability

11 11 MTEF: New Budget Process Stage 1. Macroeconomic and public sector envelopes Stage 2. High-level policy: aligning policies & objectives under resource constraints Stage 3. Linking policy, resources, and means by sector Stage 4. Reconciling resources with means Stage 5. Reconciling strategic policy and means

12 12 MTEF Process (simplified) Sectoral Budget Preparation Macro- economic forecasting Sectoral Ceiling Setting for multi years Fiscal Target Total Expenditure Setting For multi years New sectoral demand for t+2 (priority/cost) Annual Budget Formulation Updated cost estimate of existing policy/program

13 13 Implementing an MTEF Adopt framework –getting policy-official and technical staff buy-in –recognize this is continuous, long-term endeavor Customize implementation to country needs, initial conditions –macro, sectoral policy Target institutional capacity development

14 International Trend (1) MOF: different part of MOF/Treasury, CBO: central budget office, CPB: Central Planning Bureau Source: OECD-World Bank Budget Practices and Procedures Database Coverage of MTEF Responsibility of economic assumption Multi-year cost estimate for new spending Sweden 3 yrsMOFAll spending items UK 5 yrsCBOAll spending items Australia 4 yrsCBOAll spending items NZ 2 yrsMOFAll spending items Netherlands 4 yrsCPBAll spending items Norway varyingMOFNo USA N/A All spending item

15 International Trend (2) Source: OECD-World Bank Budget Practices and Procedures Database Basis of setting spending limit for ministries Final decision on ministries’ spending Arrangement in congress to establish total budget before individual item SwedenMTEFPrime MinisterYes UKMTEFMOFNo AustraliaMTEFCabinetNo NZMTEFCabinetNo NetherlandsMTEFCabinetYes NorwayN/ACabinetYes USASuggestion onlyPresidentYes

16 16 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

17 Korea’s Experience and Lessons

18 18 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

19 19 New Budget Process (1) Stage I : Macro-economic Forecasting and Long-term Fiscal Management Planning –Macro-forecasting and review of national debt levels Stage II : Fiscal Targeting, Budget Envelope, and Sectoral Allocation –Macrofiscal targets, social/political demands –New sectoral demands and updated costs estimates –National policy priority –Within total budget: zero-sum game

20 20 New Budget Process (2) Stage III : Cabinet Meetings –Draft prepared by MPB in consultation with President –2-day Cabinet meeting for consensus building (it was held on April 30 and May 1 for FY06 budget) Stage IV: Line Ministries’ Requests -Prepare budget proposals with MPB’s guidelines Stage V: Review and Documentation -Review line ministries’ requests for compliance with sectoral limits and policy priorities

21 21 Conclusion Generally, on the right track –MTEF along with other fiscal reforms: Performance management, Program budgeting, and IFIMS Track Record of Linking Budgeting to Planning –Economic Planning Board (EPB), Strong Leadership: President and MPB –promote the National Reforms Well-trained technocrats

22 22 Challenges remained Integrate NFMP with Annual budget Establish Performance management system –MTEF and Performance management Strengthen Macro-forecasting capacity –MPB and MOFE Capacity building: MPB and LMs Autonomy and Accountability –New role of MPB and LMs

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