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. PE in World Bank Objectives of PE PE issues in World Bank
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. Public Expenditure Public Expenditure Analysis (PEA)
“What” is to be done
Public Expenditure Management (PEM)
“How” it is to be done

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. Public Expenditure Analysis (2)
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)

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

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)
Coverage of MTEF
Responsibility of economic assumption
Multi-year cost estimate
for new spending
Sweden
3 yrs
MOF
All spending items UK
5 yrs
CBO
Australia
4 yrs NZ
2 yrs
Netherlands
CPB
Norway
varying No
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

15. International Trend (2)
Basis of setting spending limit for ministries
Final decision on ministries’ spending
Arrangement in congress to establish total budget before individual item
Sweden
MTEF
Prime Minister
Yes UK
MOF No
Australia
Cabinet NZ
Netherlands
Norway
N/A
USA
Suggestion only
President
Source: OECD-World Bank Budget Practices and Procedures Database

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. 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. 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. 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. 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. 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