Successful Installation of MTEF in the Korea’s Fiscal System Seok-Kyun Hur Korea Development Institute March 15, 2004

Motivation Address the necessity of Medium Term Expenditure Framework : Why we need it Discuss general features of MTEF: How it works Specific modules of MTEF to consider

MonthAction March The Ministry of Planning and Budget (MPB) sends the Guide to Budget Compilation to spending ministries. May Ministries send budget bids to MPB by the end of May. June-July MPB compiles the budget bids and prepares a preliminary budget proposal. August- September MPB goes through bilateral negotiations with spending ministries between mid- August and mid-September. MPB discusses the budget proposal with the ruling party. October Authorized by the cabinet and the president, the draft budget is sent to the National Assembly by October 2 nd. In mid-October, the Committee on Budget and Accounts begins deliberation on the draft budget. Ministers are typically requested to testify at committee meetings. Meetings are normally open to the public. December The draft budget is modified and approved by the Committee on Budget and Accounts and then by the National Assembly by December 2nd. Budget Time Table in Korea

Current Fiscal System in Korea Cons Lack of medium-term strategic perspectives Excessive reliance on the bottom-up approach Pros Emphasizing input control and regularity of budget execution Low Debt level

Purposes of MTEF Fiscal Sustainability Efficiency enhancement of public resource allocation Strengthening fiscal management system

Players Budgeting Authority Fiscal Sustainability and Efficiency of cross-sectoral resource allocation Line Ministries (Local Governments) Production efficiency (cost minimization) and Quantity maximization Public Heterogeneous in existing time time and preference

Players Ministry of Planning and Budget (MPB) Tax and Customs Office of the Ministry of Finance and Economy (MOFE) Treasury Bureau of MOFE Board of Audit and Inspection (BAI) National Assembly Spending ministries Roles Compiles budget bids and prepares the draft budget. Allocates funds to spending ministries. Prepares revenue forecasts Releases cash to spending ministries. Manages the treasury single account in the Bank of Korea. Issues government bonds and manages assets and liabilities. Prepares the whole-of-government financial reports and produces government financial statistics. Checks the regularity of ministrial activities. Prepares audit reports. Deliberates and votes on the budget and reviews audit reports. Execute the budget and prepare financial reports. Major Players in Korea’s Budget Process

Domain of Decision-making Cross-time Allocation: Fiscal Sustainability Cross-Sectoral Allocation: Burden of proof to line ministries Cross- state Diversification: Burden of financial risks to the Budgeting Authority

MPB Global Ceiling Total Revenue

t+3 t+1 t t+2 B A C Cross-Time Procedures of MTEF

Specific Considerations Coverage of MTEF Entire Consolidated following GFS

Current balances are over-stated due to the surpluses in the National Pension Fund (NPF). To assess the financial soundness correctly, NPF surpluses should be subtracted from the consolidated balance.

On the other hand, net lending tends to make the consolidated balance under-stated since the default rate on government loans are very low. We therefore adjust the balance upward by the amount of net lending.

Specific Considerations Time Horizon of MTEF Choice between Predictability and Credibility

Specific Considerations Macroeconomic Forecasting Horizon An organization in charge of economic outlook Application of forecasted figures to MTEF

Specific Considerations Balance of Top-down and Bottom-up Top-Down: information flows on macroeconomic forecasts and national priorities, broadly itemized budget allocation and risks of performance Bottom-up: information flows on performance measurement and demand or social need for specific public good and risk of budgeting and debt management These duplex exchanges of information and resources are made at legally set(or publicly guaranteed) opportunities.

Specific Considerations Categories of Spending in MTEF Accommodate a Matrix structure of budget classification and accounts The importance of coordination and communication among the line ministries participating in a similar fiscal activity

Specific Considerations Setting a global ceiling and sectoral ceilings Who sets the ceilings What factors determines the ceilings? Application of forecasted figures to MTEF: Extra Prudence Time Consistency of Ceilings Flexible VS. Inflexible Dual standards for a global ceiling and sectoral ceilings

Specific Considerations Performance Based Budgeting and MTEF Feedback cycle Difficulty in inter-program performance comparison(critical in setting the priorities) Performance Measures for MTEF Fiscal sustainability Enhancing the allocative efficiency

Concluding Remarks Budgeting process as a collective action game Rule-based pseudo market allocation MTEF as a precautionary measure