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