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Linking Policy, Planning and Budgeting :Linking Policy, Planning and Budgeting :Korean Experience and ChallengesKorean Experience and Challenges

February 7, 2007February 7, 2007

Kang Ho Lee (Kang Ho Lee (klee21@mpb.go.krklee21@mpb.go.kr) ) Director, Growth Strategy DivisionDirector, Growth Strategy DivisionMinistry of Planning and BudgetMinistry of Planning and Budget

Republic of KoreaRepublic of Korea

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1. Background of Fiscal 1. Background of Fiscal Reforms in KoreaReforms in Korea

Forecasting on Forecasting on additional spending additional spending in the futurein the future– Need extra resources, 1,100 trillion won for Need extra resources, 1,100 trillion won for vision 2030vision 2030

ReallocationReallocation of expenditure between economic and of expenditure between economic and social welfare resulted in aging and polarization social welfare resulted in aging and polarization problemsproblems– social welfare as % of total expenditure :social welfare as % of total expenditure : 9.9% (1980) → 25.2% (2005) 9.9% (1980) → 25.2% (2005) 40.0% (2030) 40.0% (2030)– % of the population over 65: 7.2% (2000) % of the population over 65: 7.2% (2000) 14.4%(2019) 14.4%(2019) 24.1%(2030) 24.1%(2030)

Increasing Increasing national debts national debts after 1997’s Korean financial after 1997’s Korean financial crisiscrisis– % of GDP : 12.3(1997) % of GDP : 12.3(1997) 23.0(2003) 23.0(2003) 33.4(2006) 33.4(2006)

Need to enhance the efficiency in public spendingNeed to enhance the efficiency in public spending

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2. Framework of Major Fiscal 2. Framework of Major Fiscal Reforms Reforms

Top-downBudgeting

System

Increasedefficiency

Enhanced linkage

Operation

Building an advanced Public Expenditure Management System

NationalFiscal Management

Plan

PerformanceManagement Legal

Frame-work

NationalFiscal

Act in 2006

Program Budget

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MaintainingGrowth

Momentum

UpgradingHuman

Resources

AdvancedSocial Welfare

System

New Social Capital

All-out Globalization

Overall Scheme

Innovative, vibrant Economy

Stable, posed Nation

Safe, equitableSociety

Korea: New Stride of Hope for New Opportunities

Institutional Reforms

ProactiveInvestment

VisionAction Plan

Vision

Goals

Strategy

Vehicles

Overall Scheme of Vision 2030

5202020102000199019800.0

10.0

20.0

30.0

40.0

50.0ratio of budget

20302005

Economy

welfare

The Change of Resource AllocationThe Change of Resource Allocationin Vision 2030in Vision 2030

• Increase of social welfare expenditure in the budget : 9.9% (1980) 25.2% (2005) 40.0% (2030)• Decrease of economic spending in the budget : 26.0% (1980) 19.9% (2005) 10.0% (2030)

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3. Linking Budget to Plans3. Linking Budget to Plans

Discordance of 2007 budget between ’06~’10 NFMP Discordance of 2007 budget between ’06~’10 NFMP and’04~’08 NFMPand’04~’08 NFMP

– Difference of total expenditures : 1.8%Difference of total expenditures : 1.8%– Difference of Revenue : 4.4%Difference of Revenue : 4.4%

3-1. NFMP(MTEP)3-1. NFMP(MTEP)

(unit : trillion won)

2007 Budget in NFMPs2007 Budget in NFMPs

’’04~’08(2004)04~’08(2004) ’’05~’09(2005)05~’09(2005) ’’06~’10(2006)06~’10(2006)

Expenditure 234.2 234.8 238.5

Revenue 263.0 253.6 251.8Managed fiscal balance

(Ratio of GDP, %) 0.3 1.1 1.5

National Debt(Ratio of GDP, %) 28.8 31.7 33.4

GDP growth rate 5% 4.9% 4.6%

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3-2. Performance Management 3-2. Performance Management SystemSystem

Establishment of an ex-post control system thatEstablishment of an ex-post control system that reflects the performance in budgetingreflects the performance in budgeting

– 1/3 of budgetary programs are evaluated and reflected1/3 of budgetary programs are evaluated and reflected

(unit : trillion won)

’’06 (555 projects)06 (555 projects) ’’07 (577 projects)07 (577 projects)

budgetbudget Change to the Change to the previous yearprevious year budgetbudget Change to the Change to the

previous yearprevious year

Total 34.2 -1.0 33.5 -1.7

Effective 2.0 0.5 0.93 0.04Mod effective 9.3 1.3 3.5 0.2

Adequate 20.3 -1.3 28.6 -1.3Ineffective 2.6 -1.5 0.5 -0.6

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Program budget is a critical “building block” to link Program budget is a critical “building block” to link NFMP, Top-down budgeting, and PMS in a wholeNFMP, Top-down budgeting, and PMS in a whole ProcessProcess

– For NFMP: provide program initiatives toFor NFMP: provide program initiatives to represent medium-term national prioritiesrepresent medium-term national priorities

– For Top-down Budgeting: provide theFor Top-down Budgeting: provide the consultative bases to decide expenditureconsultative bases to decide expenditure ceilings between line ministries and MPBceilings between line ministries and MPB

– For Performance Management System:For Performance Management System: provide the units to link resources and resultsprovide the units to link resources and results

3-3. Program Budgeting3-3. Program Budgeting

Top-DownBudget PMS

NFMP(MTEF)

ProgramBudget

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3-4. Top-down Budgeting(1)3-4. Top-down Budgeting(1)

Budget Range

• Bottom-up : expenditure of program A goes to T, and spending of program B goes to TR

• Top-down : expenditures of program A and B go to 2 times ß

￣

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Basic HypothesisBasic Hypothesis

– Cost functionCost function

– Utility function of line ministryUtility function of line ministry

– Scale of budgetScale of budget

– Net valueNet value

– Total ValueTotal Value

eegeC )(),(

)(etU

CtT

))(1( etSV

)())(1( etetSUVW UeeS )}(){1(

<Attach1> Theoretical background <Attach1> Theoretical background of Top-down budgeting(1)of Top-down budgeting(1)

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Incentive compatibility(IC) and Individual rationality(IR)Incentive compatibility(IC) and Individual rationality(IR)

Maximized conditionMaximized condition

Optimized budgetOptimized budget

<Attach2> Theoretical background <Attach2> Theoretical background of Top-down budgeting(2)of Top-down budgeting(2)

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253 254

132

253

154

60

188154

60

0

50

100

150

200

250

300

2004 budget 2005 budget 2006 budget

(100M Won)

Line bureau Line Ministry MPB draft budget

3-4. Top-down Budgeting(2)3-4. Top-down Budgeting(2)

• Enhancing accountability of line ministries Actual case of Bottom-up → Top-down : Ministry of Maritime Affairs and Fishery

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Low incentives from performance evaluationLow incentives from performance evaluation

Too focused on the adequate category Too focused on the adequate category (85% of 2007 budget)(85% of 2007 budget)

Difference between evaluating year and reflecting yearDifference between evaluating year and reflecting year

Difficulties in building effective evaluation indexDifficulties in building effective evaluation index

4. Challenges to Performance 4. Challenges to Performance Management System(1) Management System(1)

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Align the annual budget classification with the Align the annual budget classification with the classification in the NFMPclassification in the NFMP

Keep programs within the organizational structureKeep programs within the organizational structure

Combine all activities according to program objectives Combine all activities according to program objectives regardless of revenue sourcesregardless of revenue sources

Simplify the grouping of object levelsSimplify the grouping of object levels

4. Challenges to Program Budget 4. Challenges to Program Budget (2)(2)

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Time constraint on the MTEFTime constraint on the MTEF

How to meet expenditure ceilings How to meet expenditure ceilings

Mainly focused on the next year budgetMainly focused on the next year budget

Unit in setting expenditure ceilings : Unit in setting expenditure ceilings :

program or subsectionprogram or subsection

How to harmonize the top-down budget and How to harmonize the top-down budget and deliberation process deliberation process

4. Challenges to MTEF and4. Challenges to MTEF andTop-down Budget (3)Top-down Budget (3)

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206

41 5345 41 5340

45

131

102 10585 80

105115112

0

50

100

150

200

250

2004 2005 2006 2007

Prog

ram

A(10

0M W

on

020406080100120140

Prog

ram

B(10

0M W

on)

Line M Bgt of A MPB Bgt of A Line Bgt of B MPB Bgt of B

Top-downBottom-up

Ex) Behavior Changes in RequestingEx) Behavior Changes in RequestingBudget from Line Ministries Budget from Line Ministries

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Thank YouThank You