0 Linking Policy, Planning and Budgeting : Korean Experience and Challenges February 6, 2007 February 6, 2007 Kang Ho Lee Director, Growth Strategy Division Ministry of Planning and Budget Republic of Korea

1 1. Background of Fiscal Reforms in Korea  Forecasting on additional spending in the future additional spending additional spending –Need extra resources, 1,100 trillion won for vision 2030 vision 2030vision 2030  Reallocation of expenditure between economic and social welfare resulted in aging and polarization problems Reallocation –social welfare as % of total expenditure : 9.9% (1980) → 25.2% (2005)  40.0% (2030) 9.9% (1980) → 25.2% (2005)  40.0% (2030) –% of the population over 65: 7.2% (2000)  14.4%(2019)  24.1%(2030)  Increasing national debts after 1997’s Korean financial crisis national debts national debts –% of GDP : 12.3(1997)  23.0(2003)  33.4(2006)  Need to enhance the efficiency in public spending

2 Extra resources in need : 2% of GDP (avg] Total Expen diture under Vision 2030 More Spending w/o Inst. Reform Current System 2% of GDP Savings from Inst. Reform 3% of GDP 1-1. Forecast of Fiscal Resources in Vision 2030

ratio of budget Economy welfare 1-2. The Change of Resource Allocation in 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)

1-3. National Debt Ratio of GDP since Ratio(%) ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ‘ National Budget Support to Economic Crisis( ￦ 49 Trillion) IMF Economic Crisis

5 2. Framework of Major Fiscal Reforms Top-down Budgeting System Increased efficiency Enhanced linkage Operation Building an advanced Public Expenditure Management System National Fiscal Management Plan National Fiscal Management Plan Performance Management Legal Frame- work National Fiscal Act in 2006 Program Budget

6  President has initiated budget reforms in 2003  MPB has taken actions on budget reforms after that  Congress passed the National Fiscal Act last year  Lots of discussion between MPB and line ministries 2-1. What organization is responsible for budget reforms? MPB (Budget M) President Line Ministries Congress  EPB (Deputy Prime M), 1960s~1994  MOFE (Deputy Prime M), 1994~1998  MPB (Minister), 1998~present

7 3. Linking Budget to Plans  Discordance of 2007 budget between ’06~’10 NFMP and’04~’08 NFMP –Difference of total expenditures : 1.8% –Difference of Revenue : 4.4% 3-1. NFMP(MTEP) (unit : trillion won) 2007 Budget in NFMPs ’04~’08(2004)’05~’09(2005)’06~’10(2006) Expenditure Revenue Managed fiscal balance (Ratio of GDP, %) National Debt (Ratio of GDP, %) GDP growth rate5%4.9%4.6%

8  Program budget is a critical “building block” to link NFMP, Top-down budgeting, and PMS in a whole Process –For NFMP: provide program initiatives to represent medium-term national priorities represent medium-term national priorities –For Top-down Budgeting: provide the consultative bases to decide expenditure consultative bases to decide expenditure ceilings between line ministries and MPB ceilings between line ministries and MPB –For Performance Management System: provide the units to link resources and results provide the units to link resources and results 3-2. Program Budgeting Program Budget NFMP (MTEF) PMS Top- Down Budget

9  Low incentives from performance evaluation  Too focused on the adequate category (85% of 2007 budget)  Difference between evaluating year and reflecting year  Difficulties in building effective evaluation index 4. Challenges to Performance Management System(1)

10  Align the annual budget classification with the classification in the NFMP  Keep programs within the organizational structure  Combine all activities according to program objectives regardless of revenue sources  Simplify the grouping of object levels 4. Challenges to Program Budget (2)

11  Time constraint on the MTEF  How to meet expenditure ceilings  Mainly focused on the next year budget  Unit in setting expenditure ceilings : program or subsection program or subsection ⑤ How to harmonize the top-down budget and deliberation process 4. Challenges to MTEF and Top-down Budget (3)

12 Thank You

13 Maintaining Growth Momentum Maintaining Growth Momentum Upgrading Human Resources Advanced Social Welfare System Advanced Social Welfare System New Social Capital New Social Capital All-out Globalization Overall Scheme Innovative, vibrant Economy Stable, posed Nation Stable, posed Nation Safe, equitable Society Safe, equitable Society Korea: New Stride of Hope for New Opportunities Institutional Reforms Proactive Investment Vision Action Plan Vision Goals Strategy Vehicles Overall Scheme of Vision 2030