Medium-term Expenditure Framework - with Korea’s experience - Doyoung Min The World Bank Public Financial Management Workshop, Vientiane, Laos, May 23-26, 2005

PE in World Bank Objectives of PE PE issues in World Bank A critical ingredients in a country’s development Poverty alleviation and creating an enabling environment for the private sector PE issues in World Bank In the WB matrix, PE covers every region and various sectors such as Public Finance and PREM Public expenditure issues touch on virtually every aspect of the World Bank’s work

Public Expenditure Public Expenditure Analysis (PEA) “What” is to be done Public Expenditure Management (PEM) “How” it is to be done

Public Expenditure Analysis (1) The role of the state Market failure and distributional inequity  Government intervention Improving efficiency of economy/distribution of income * Government failure vs. Market failure Public spending and budget deficit How is the deficit measured? What is the composition of deficit financing? What is the sustainable amount of fiscal deficit?

Public Expenditure Analysis (2) Efficiency Appropriate instrument for public intervention Fiscal costs associated with public intervention Impact of public intervention Equity What are key distributional objectives of PE? How PE best meet these objectives? How assess welfare impacts of PE? Fiscal decentralization (Fiscal Federalism)

Basic Objectives of Public Expenditure Management Level 1: Aggregate Fiscal Discipline (Budget totals as the result of explicit, enforced decisions) Level 2: Allocative Efficiency (Expenditure according to government priorities and effectiveness of public programs) Level 3: Operational Efficiency

Key components of PEM MTEF Linking policy, planning and budgeting Performance management Integrated Financial management information system (IFMIS) Fiscal transparency

Medium-Term Expenditure Framework

What is an MTEF? Conceptual framework for public finance systems ties together multiple technical reforms gives paradigm for understanding import of technical reforms Process, not only components of PEM systems process of government decision-making Multi-year emphasis Emphasizing policy steering versus rowing for senior officials, organizations linking policy, inputs, outputs, objectives Effort to change paradigm of actors in system

Objectives of MTEF Improve macrofiscal situation lower deficits, improved economic growth more rational approach to retrenchment and economic stabilization Improve impact of Government policy link between government priorities/policies and government programs Improve program performance/impact Shift bureaucracy from administrative to managerial culture Managerial flexibility & innovation: lower cost/output; greater effectiveness of programs/policies Improved resource predictability

MTEF: New Budget Process Stage 1. Macroeconomic and public sector envelopes Stage 2. High-level policy: aligning policies & objectives under resource constraints Stage 3. Linking policy, resources, and means by sector Stage 4. Reconciling resources with means Stage 5. Reconciling strategic policy and means

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

Implementing an MTEF Adopt framework getting policy-official and technical staff buy-in recognize this is continuous, long-term endeavor Customize implementation to country needs, initial conditions macro, sectoral policy Target institutional capacity development

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

International Trend (2) 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 UK MOF No Australia Cabinet NZ Netherlands Norway N/A USA Suggestion only President Source: OECD-World Bank Budget Practices and Procedures Database

Lessons from International Experiences 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

Korea’s Experience and Lessons

Why MTEF? Short-term Perspective with Bottom-up Approach Yearly based revenues and expenditures Weak linkage between national policy priorities and budgeting Future Fiscal Risk Social welfare expenditure demands/rapidly aging population Inefficiency from Managerial Inflexibility Limited autonomy to plan policy and implement budget

New Budget Process (1) Stage I : Macro-economic Forecasting and Long-term Fiscal Management Planning Macro-forecasting and review of national debt levels Stage II : Fiscal Targeting, Budget Envelope, and Sectoral Allocation Macrofiscal targets, social/political demands New sectoral demands and updated costs estimates National policy priority Within total budget: zero-sum game

New Budget Process (2) Stage III : Cabinet Meetings Draft prepared by MPB in consultation with President 2-day Cabinet meeting for consensus building (it was held on April 30 and May 1 for FY06 budget) Stage IV: Line Ministries’ Requests Prepare budget proposals with MPB’s guidelines Stage V: Review and Documentation Review line ministries’ requests for compliance with sectoral limits and policy priorities

Conclusion Generally, on the right track MTEF along with other fiscal reforms: Performance management, Program budgeting, and IFIMS Track Record of Linking Budgeting to Planning Economic Planning Board (EPB), 1961-1994 Strong Leadership: President and MPB promote the National Reforms Well-trained technocrats

Challenges remained Integrate NFMP with Annual budget Establish Performance management system MTEF and Performance management Strengthen Macro-forecasting capacity MPB and MOFE Capacity building: MPB and LMs Autonomy and Accountability New role of MPB and LMs