Linking between Planning and Budget : Korea’s Experience and Lessons Dong Yeon Kim Ministry of Planning and Budget Republic of Korea For PRODEV, Inter-American Development Bank

Table of Contents I. Introduction II. New Budget System: MTEF along with Top-down Approach III. Strengthening Strategic Planning: “ Vision 2030” IV. The Road Ahead

I. Introduction

Significance of Linking Planning & Budget An important factor in Korea ’ s economic development era and even present From the planning perspective - Realization / actualization of the plan - Linkage with budget allows efficient management of results From the budgeting perspective - Maintenance of aggregate fiscal discipline - Prioritization: basis for resource allocation

Establishment of institutional systems - Economic Planning Board (’61~’94) : planning and budgeting functions under one roof - The Minister was concurrently a Deputy Prime Minister - Strong political support and leadership - 5-year Economic and Social Development Plans (’62~’96) Resulting in rapid economic growth Korea’s Experience in Development Era

Recent Developments Introduction of MTEF (2004) - Integrating national policy priorities into annual budget - Providing mid-term perspective on expenditure plan - Enhancing operating efficiency Strengthening strategic planning (2005~2006): Formulation of “ Vision 2030 ” - Establish the Strategic Planning Bureau - Set up a long-term national plan with a 25-year time horizon - Enhance the realizability of the “ Vision 2030 ” through a new budget system

II. New Budget System: MTEF along with Top-down Approach

Short-term Perspective with Bottom-up Approach Yearly based revenues and expenditures Medium-term Fiscal Plan developed but not integrated into budget process Incremental increases to budget by functional classification Weak high level consensus in decision-making Lack of transparency 1. Why MTEF? (1)

Future Fiscal Risks Social welfare expenditure demands - Benefits from pensions to hit 11.1% of GDP by 2035 Rapidly aging population - Aged population 7% in 2000  14% by 2019 On-going costs of financial restructuring Cost of divided peninsular and possible unification Why MTEF (2)

Inefficiency from Managerial Inflexibility Deep involvement by MPB in all stages High transaction costs and informality in public sector Lack of managerial flexibility Limited autonomy to plan policy and implement budget Why MTEF (3)

2. Objectives of MTEF Integrate national policy priorities into annual budget Provide mid-term perspective (3-5 yrs) on expenditure plan Enhance operating efficiency with increased line ministries’ discretion over their spending Strengthen feedback and accountability mechanism by performance management

3. Korea’s MTEF Initiative Long-term Perspective Top-down Approach Strategic Decision Making Mechanism Decentralisation

4. Unique Features Link national policy to resource allocation to set up priorities Proven track-record in linking planning and budgeting Institutional division of roles between MPB & MoFE Well-trained technocracy distanced from political pressure

Track-record of linking budgeting with national planning Economic Planning Board (EPB), : - planning and budgeting functions reside under one roof Strong political support and leadership - monthly President’s visit to EPB - minister of EPB holds position of Deputy Prime Minister (influence over line ministries for coordination) In retrospect, MTEF exercised without calling it MTEF

Sectoral Budget Preparation Macro- economic forecasting Sectoral Ceiling Setting for multi years Fiscal Target Total Expenditure Setting For multi years New sectoral demand for t+2 (priority/cost) Annual Budget Formulation Updated cost estimate of existing policy/program 5. MTEF Process (Simplified)

6. Key Issues 6.1. Macroeconomic Forecasting MPB plays a key role in macroeconomic forecasting for fiscal policy purpose Coordination mechanism with MoFE, BoK, public/private research institutes Formula for conservative forecasting for budgeting

Total budget setting - - Macro/fiscal targets, social/political demands - - New sectoral and updated costs estimates Sectoral allocation - - National policy priority - - Determined within total budget : zero-sum game Final draft prepared by MPB Special cabinet meeting for resource allocation 6.2. Budget Aggregate and Sectoral Ceiling

Sectoral priority discussed and agreed between MPB and line ministries Line ministries prepare own budget proposal within provided ceiling and priority line MPB’s monitoring and coordination mechanism Incentive for efficient spending 6.3. Discretion

For MPB - - Shift to higher level, macro decision-making - - Analysis of macro-economics and national policy priorities - - Preparation of draft proposals for cabinet meetings - - Monitoring & coordination of line ministries’ budget proposals - - Interaction with the president For line ministries - - Discretion in planning within sectoral limits and policy agenda - - Discretion in prioritisation to effect policy outcomes - - Flexibility in implementing policy and executing budget 6.4. New Incentive System

Need for institutional arrangements to support performance orientation Linking performance with accountability - - Responsibility for performance rests with ministers - - Discretion in management, organizational structure MPB as watchdog of line ministries’ performance Integration of information system between MPB, MOFE, line ministries, and NAB 6.5. Performance & Accountability (1)

Utilized as information gathering and analysis rather than direct link with budget allocation Long-term, phased approach is desirable, need to adopt realistic short-term approach Pilot projects to introduce output-based indicator development and performance evaluation system Expand into all programs with outcome indicators 6.5. Performance & Accountability (2)

Need for strong budget basics and to simplify existing complexity Complexity of budget structure - - One General Account, 23 Special Accounts, 45 Funds, 2,000 appropriations, and 6,000 sub-accounts Classification system emphasises input controls Lacks transparency and is technically cumbersome 6.6. Budget Structure and Scope

CBO: central budget office, MoF: different part of MoF/Treasury Source: OECD-World Bank Budget Practices and Procedures Database Coverage of MTEF Responsibility of economic assumption Multi-year cost estimate for new spending Sweden 3 yrsMoF * All spending item Norway varyingMoF * No UK 5 yrs CBO All spending item Australia 4 yrsCBO All spending item NZ 2 yrsMoF * All spending item USA N/A All spending item International Trend (1)

Source: OECD-World Bank Budget Practices and Procedures Database 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 Norway N/ACabinetYes UK MTEFMoFNo Australia MTEFCabinetNo NZ MTEFCabinetNo USA Suggestion only PresidentYes International Trend (2)

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 Lessons from International Experiences

III. Strengthening Strategic Planning: “Vision 2030”

1. The Need for Strategic Planning Facing new challenges, mostly long-term issues Internal challenges - Bipolarization - Low fertility rates, population ageing - Slowdown of growth engines - Changes in the inter-Korea relations External challenges - Increasing influence of China in the world - Globalization - Informatization and new technology “ Vision 2030 ” : 25-years time horizon long-term strategic plan

2. Socioeconomic Innovation Need to innovate economic and social systems - Expanding investment without systems innovation threatens fiscal sustainability DevelopingDevelopingIndustrializedIndustrializedAdvancedAdvanced GNI per capita GNI per capita Source : IMF SystemsAdvancement ChinaChina PolandPoland RussiaRussia BahrainBahrain ItalyItaly FranceFrance JapanJapan U.S.AU.S.A SpainSpain SingaporeSingapore New Zealand K orea

3. Preemptive Investment in Areas of Necessity Expanding investment in growth potential and meeting the basic needs of citizens - On growth and innovation base (R&D, higher education) - On welfare and social safety net (pension, health, childcare, housing, security) IncomeIncome TimeTimePresentPresent Leading Area Delayed Area Sustainable growth, less bipolarization (Netherlands, Norway) Delayed growth, more bipolarization (Latin America)

4. Structure Korea: A Hopeful Nation in Harmony Innovative,dynamiceconomy Safe,equitablesociety Secure,Respectednation Economicgrowthengines Developedhumancapital Advancedsocialwelfare Expandedsocialcapital Activeglobali-zation Systems reform Preemtive investment Vision Objective Strategy Means

5. Fiscal Implications Fiscal Implications of systems innovation and preemptive investment Total Expenditure Vision 2030 No Systems innovation Current Stance Result of innovation

6. Future Expenditure % of Total Budget 2030 Social Economic KimYSKimDJRohMH

7. Korea in 2030 GDP per capita Source : OECD NorwayNorway SwitzerlandSwitzerland DenmarkDenmark SwedenSweden GermanyGermany GreeceGreece PolandPoland MexicoMexico U.K.U.K.OECDAverageOECDAverageJapanJapan U.S.A.U.S.A. Social public spending (% of GDP) Korea in 2020 KoreaKorea Korea in 2030

VI. The Road Ahead

Achievements Linkage between yearly budget, MTEF, and long-term national vision Change of budget structure with strategic allocation of resources Enhancement of fiscal soundness Improvement of performance management and accountability

Future Tasks Promoting leadership of the budget authority Establishing an expenditure ceiling determination system Linking policy priorities within sectors/ministries with strategic resource allocation Ensuring the accountability of line ministries Strengthening budgetary basics - program budgeting, digital budget and accounting system Reinforcing the macro-analysis and policy functions of the budget authority Reforming the parliamentary budget process and behavior

“ A budget is much more than a collection of numbers. A budget is a reflection of a nation ’ s priorities, its needs, and its promise. ”