PUBLIC FINANCE

Korea Case - MTEF
MAY 1, 2012 YOUNG KYU KANG SENIOR PUBLIC SECTOR SPECIALIST WORLD BANK PRMPS

Contents
Why Korea?
- Fiscal Consolidation and Uniqueness

Features of Korean MTEF
- MTEF introduction - Relationship with other PFM

Lessons from Korean MTEF
- Ownership - Going Public - Continuous updating

Why Korea?
FISCAL CONSOLIDATION

• Fiscal Consolidation has been and will be restored quickly after Global Financial Crisis
% of Fiscal balance/GDP
Source: 2011-2015 NFMP, MOSF

4 2 0 -2 -4 -6
2011-2015 NFMP

Consolidated Fiscal Balance Managerial Fiscal Balance*
* MFB=CFB-Balances of 4 social insurance funds such as ‘National Pension Fund’

MTEF is the critical tool for restoring Fiscal Consolidation while supporting national agenda such as Green Growth

Why Korea?
UNIQUENESS Introduction style

• Big Bang, not platform approach

MTEF stage

• MTPF (stage 3)

Due to Korea’s sound PIM system and the simultaneous introduction of PBB and MTEF, not only was Big bang reform possible but also the jump of MTEF stage from MTFF to MTPF Sound fiscal consolidation was key factor to overcome financial crisis in 1997 and 2008

Features of Korean MTEF - Introduction stages -

Features of Korean MTEF?
1. MTEF INTRODUCTION
Who

• Budget Office initiated MTEF introduction by persuading stakeholders
• To consider future expenditure needs in Social Welfare and the need to allocate resources strategically • MTEF (with Top-down budgeting, PBB) • Without specific fiscal reforms for decades, the reforms happened from 2004-2007 • By empowering budget formulation authority to LMs and appealing decentralization to the public and political stakeholders

Why

What

When

How

Ref: Incentives to stakeholders

Budget Office

-Strengthening Policy initiatives (while empowering budget authority to LMs) -Fiscal Consolidation

-Transparency (aligned with the philosophy of political regime) -Control (Tool for supporting national agendas fiscally)

President

-Strategic Resource Allocation -Fiscal consolidation -Transparency

Assembly The Public/ Experts

Internal Staff
-Empowerment (BO will respect LMs budget request within the ceiling)
-Certainty in budget allocation

Line Ministries

Features of Korean MTEF
2. RELATIONSHIP WITH OTHER PFM
• As MTEF was introduced, Top-Down Budgeting was required, and these two reforms initiated PBB
Annual budgeting Top-Down
(from Bottom-up)
Changes in budget Calendar

MTEF

Integrated FMIS

PBB
(PART/In-Depth Study)

Fiscal Reforms closely connected with each other and function harmoniously

Lessons from Korean MTEF - Operation stages -

Lessons from Korean MTEF
1. OWNERSHIP • The President and Cabinet endorse MTEF • Budget authority
- maintain MTEF even in Global Financial Crisis - try to keep fiscal balance target and fiscal support for national agenda as envisaged in MTEF by restructuring expenditures through prioritization*
* Ineffective Program by PART result will be cut by 10% comparing with last year’s budget

→ System itself does not verify success, Ownership does matter

Ref: Comparison of last 3 MTEFs
(Trillion Korean Won, % of GDP)

Category Revenue

MTEF 2011-2015(A) 2010-2014(B) 2009-2013(C) Gap(A-C) Expenditure 2011-2015(D) 2010-2014(E) 2009-2013(F) Gap(D-F) Consolidated 2011-2015(G) Fiscal 2010-2014(H) Balance 2009-2013(I) Gap(G-I)

2010 290.8 287.8

292.8 291.8

-0.2 -0.4

2011 2012 2013 2014 2015 314.4 344.1 375.7 395.8 415.3 314.6 342.9 365.1 390.9 309.5 337.6 361.7 4.9 6.5 14.0 309.1 326.1 341.9 357.5 373.1 309.6 324.8 337.7 353.0 306.6 322.0 335.3 2.5 4.1 6.6 0.4 1.3 2.3 2.4 2.5 0.4 1.3 1.9 2.5 0.2 1.2 1.9 0.2 0.1 0.4
Source: MOSF NFMPs

-Conservative Revenue forecast -Increase in expenditure is well below that of revenue -With this effort fiscal balance is getting better than last MTEF

Lessons from Korean MTEF
2. PARTICIPATION AND GOING PUBLIC • MTEF and annual budgeting procedures involve participation from both experts and the public through public hearing or discussion on major fiscal agenda while making MTEF → Give Justification to MTEF • When MTEF is submitted to the Assembly it is informed to the public → Play a constraint to the stakeholders

Lessons from Korean MTEF
3. CONTINUOUS UPDATING
• Since the introduction of MTEF in 2004, whenever there are challenges in MTEF, Budget office amends and updates MTEF - Example 1: Some LMs announced new plan without coordination with MTEF, and the completion of MTEF was threatened → In 2008 the Budget office added ‘prior coordination with MTEF rule’ in the National Fiscal Management Law - Example 2: Initially the Budget office allocated 5 year resource allocation on every project while making MTEF. This practice was not only time-consuming but also redundant between MTEF and annual budgeting from LMs → Budget office only forecast major projects and fluctuating projects while treating other projects on lump sum → Initial MTEF cannot be perfect

Thank you
Young Kyu Kang Senior Public Sector Specialist World Bank PRMPS ykang2@worldbank.org Office phone: 1 (202) 458-9451

Ref: MTEF & Budgeting Calendar
Month
1 Before MTEF Introduction After MTEF Introduction MTEF Preparation (LMs)

2
3 4 5 6 7 8 9 10 11

No official process
-BO checks major ongoing and new projects internally -LMs request next year budget on May 31

MTEF Draft (BO) -Coordination(BO/LMs) -Cabinet Meeting -Ceiling informed to LMs
Budget Draft by LMs

-MTEF T/F Team Work -Finalizing MTEF -Submit to the Assembly

- Budget Formulation (without ceiling) - MOSF submit Budget Draft to the Assembly

-Budget Formulation (with ceiling) -Submit to the Assembly - Assembly Review

- Assembly Review

12

Ref: MTEF and Annual Budget Process 1

January 3
MOSF→LMs

MOSF (Budget Office) sends the guideline for rolling MTEF to LMs
- Guideline covers how and in what case resource can be increased

January 31
LMs→MOSF

LMs request new MTEF plan to MOSF
- Considering changes in Economic & Social situation and new national agenda, LM request new MTEF draft

Feb - Apr
MOSF/LMs

MOSF makes MTEF draft through coordination with LMs
- MTEF T/F teams are organized and research is initiated on the policy direction of resources allocation. - Public hearing executed - Fiscal Strategic Cabinet Meeting endorse sectoral allocation & Ceilings to LMs while discussing fiscal and national issues

Ref: MTEF and Annual Budget Process 2

Apr 30
MOSF→LM

MOSF (Budget Office) sends Budget call circular and the ceilings to LMs
- Budget call circular covers economic condition forecast and resource allocation direction - Next years expenditure in MTEF are set as ceilings (Ceilings for sectoral, entities and some major project)

May - June
LM

LMs formulate their own budget draft
- Considering changes in Economic & Social situation and new national agenda, LM request new MTEF draft

June 30
LM →MOSF

LMs request next year budget to MOSF
- Considering the ceilings informed, LMs make budget draft

Ref: MTEF and Annual Budget Process 3

July-Sept
MOSF/LM

MOSF settle the budget for each project with consultation with LMs considering MTEF T/F recommendation
- Budget review committee in Budget office decide final allocation - After MTEF introduction Budget office review only some major and important projects while checking whether national agenda are properly supported (Ceilings for sectoral, entities and some major project) - MTEF is finalized by adjusting with annual budget and reflecting MTEF T/F teams suggestions - With MTEF introduction, the budget coordination period was shortened by a month whereas LMs Budget formulation period extended by a month

Ref: MTEF and Annual Budget Process 4

Oct 2
MOSF

MOSF submit Budget Draft to Assembly for finalization and MTEF for information
- With meetings with stakeholders like fiscal experts, LMs and local governments, Budget office finalize budget draft

Oct-Dec 2
Assembly

Assembly finalize budget through each standing committee and Budget committee

December
MOSF/LMs

MOSF submit Budget Draft to Assembly
- Under the finalized budget MOSF set disbursement plan by matching revenue and expenditure schedule

Ref: Contents of Korean MTEF

Overview

-Fiscal Policy direction and future goal -Economic forecast based on internal and external conditions → Growth rate forecast → Revenue forecast -Integrated Expenditure forecast considering national agenda and other policy supports -Government debt and Fiscal Balance forecasts -Ratio of tax against national income -Sectoral expenditure allocation plan - 16 areas (R&D, SOC, Social Welfare etc.) covered -Each sector consists policy direction and the annual size of resources -Major project’s detail investment plan commented

Detail plan by sectors

How to decide fiscal envelope
INTEGRATION OF TOP-DOWN AND BOTTOM-UP
Economic Policy Bureau
Growth forecast

Tax Office
Tax revenue forecast

Budget Office

Economic forecast

Revenue forecast Fiscal Targeting

T/F teams
External expert

Expenditure forecast

Ceilings

Expenditure requests

Line ministries

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