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Successful Installation of MTEF in the Korea’s Fiscal System
Seok-Kyun HurKorea 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
Month Action
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 2nd. 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 maximi
zation
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
Figure2 Cross-sectoral Procedure for MTEF
DemandEstimates
MinistryA
MinistryB
MinistryC
MinistryD
Sector 1 Q(A,1) Q(B,1) Q(C,1) Q(D,1)
Sector 2 Q(A,2) Q(B,2) Q(C,2) Q(D,2)
Sector 3 Q(A,3) Q(B,3) Q(C,3) Q(D,3)
SectoralCeilings
MinistryA
MinistryB
MinistryC
MinistryD
Sector1 R(A,1) R(B,1) R(C,1) R(D,1)
Sector2 R(A,2) R(B,2) R(C,2) R(D,2)
Sector3 R(A,3) R(B,3) R(C,3) R(D,3)
Total Revenue
Global Ceiling
MPBMPB
Global Ceiling
Total Revenue
t+3t+1t t+2
B
A
C
Cross-Time Procedures of MTEF
Table 4 Anticipated Outcomes from the Introduction of MTEF
RESULTS OUTCOMES
For the agency:
Baseline budget for cover all multi-year projects of agencies Operation efficiency
Provides hard yet predictable budget ceilings Fiscal discipline
Budget preparation focus on new proposals Allocative efficiency
Frees agency time on contentious deliberations on existingproposals
Allocative efficiency
RESULTS OUTCOMES
At the oversight level:
Strengthen control over agency expenditure trends Fiscal discipline
Indicates leeway for new expenditure proposals and need fornew revenue or savings measures
Fiscal discipline
Longer timeframe to calibrate fiscal actions/ decisions Allocative efficiency
Decongests and focuses budget preparation on newpolicies/ programs
Allocative efficiency
Specific Considerations
Coverage of MTEF Entire Consolidated following GFS
Current balances are over-stated due to the surpluses in the NationalPension 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 balanceunder-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 MTEFChoice between Predictability and Credibility
Table 5 Time Coverage of MTEF
Time Horizon 2-year 3-year 4-year 5-year
Country Italy Canada, Cazech,
France, Germany,
Sweden, UK
Netherlands,
New Zealand
Mexico
USA
Specific Considerations
Macroeconomic ForecastingHorizonAn organization in charge of economic outlookApplication of forecasted figures to MTEF
Specific Considerations
Balance of Top-down and Bottom-upTop-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 MTEFAccommodate 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 ceilingsWho sets the ceilingsWhat factors determines the ceilings?Application of forecasted figures to MTEF: Extra Prudence
Time Consistency of CeilingsFlexible VS. InflexibleDual standards for a global ceiling and sectoral ceilings
Specific Considerations
Performance Based Budgeting and MTEFFeedback cycleDifficulty in inter-program performance comparison(critical in setting the priorities)
Performance Measures for MTEFFiscal sustainabilityEnhancing the allocative efficiency
Concluding Remarks
Budgeting process as a collective action game
Rule-based pseudo market allocation
MTEF as a precautionary measure