Introduction to MTEF in Korea Doyoung Min The World Bank

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

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

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

Medium-Term Expenditure Framework

6 Background of MTEF Changing role of budgeting Changing role of budgeting from control (spending) to management (policy) Increasing difficulty of maintaining fiscal soundness Increasing difficulty of maintaining fiscal soundness slowed economic growth, built-in entitlement Growing demand for public spending Growing demand for public spending aging population, education, social welfare Demand for more democratized and transparent budgeting process Demand for more democratized and transparent budgeting process

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

8 International Experiences (1) 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 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) Basis of setting spending limit for ministries Final decision on ministries’ spending Arrangement in congress to establish total budget before individual item Arrangement in congress to establish total budget before individual item Sweden SwedenMTEFPrime MinisterYes UKMTEFMOFNo AustraliaMTEFCabinetNo NZMTEFCabinetNo NetherlandsMTEFCabinetYes NorwayN/ACabinetYes USASuggestion onlyPresidentYes Source: OECD-World Bank Budget Practices and Procedures Database

10 Lessons from International Experiences Integration of multi-year planning with annual budget Integration of multi-year planning with annual budget MTEF and annual budgeting is ‘one’ process Honest/realistic macroeconomic forecasting Honest/realistic macroeconomic forecasting Separation of total budget from detailed program Separation of total budget from detailed program Clarification of new roles of MOF/line ministries Clarification of new roles of MOF/line ministries Capacity building and incentives for MOF/LMs Capacity building and incentives for MOF/LMs Development of feedback mechanism Development of feedback mechanism

MTEF in Korea

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

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

14 Recent Fiscal Reform Initiatives 2003: Design and preparation of PEM reform 2003: Design and preparation of PEM reform NFMP, Top-down, Performance management 2004: Implementation of a series of fiscal reform initiatives 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 2005: Strengthen the link among reform initiatives FY06 budget prepared through new PEM system

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

16 New Budget Process (1) Stage I : Macroeconomic Forecasting and Long-term Fiscal Management Planning Stage I : Macroeconomic Forecasting and Long-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 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 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 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 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 Total Expenditure Setting For multi years MTEF Process MTEF Process Sectoral Budget Preparation Macro- economic forecasting Sectoral Ceiling Setting for multi years Fiscal Target New sectoral demand for t+2 (priority/cost) Annual Budget Formulation Updated cost estimate of existing policy/program

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

23 Challenges Remained (1) Integration of NFMP to annual budget Integration of NFMP to annual budget Annual budget should be the first year budget of NFMP Macro-forecasting capacity 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 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 Change of organizational culture in addition to organizational restructuring Performance-oriented Comprehensive government reform including civil service system