1. 0 Linking Policy, Planning and Budgeting : Korean Experience and Challenges February 7, 2007 February 7, 2007 Kang Ho Lee (klee21@mpb.go.kr) klee21@mpb.go.kr Director, Growth Strategy Division Ministry of Planning and Budget Republic of Korea

2. 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

3. 2 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

4. 3 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

5. 4 20202010200019901980 0.0 10.0 20.0 30.0 40.0 50.0 ratio of budget 2030 2005 Economy welfare 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)

6. 5 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) Expenditure234.2234.8238.5 Revenue263.0253.6251.8 Managed fiscal balance (Ratio of GDP, %) 0.31.11.5 National Debt (Ratio of GDP, %) 28.831.733.4 GDP growth rate5%4.9%4.6%

7. 6 3-2. Performance Management System  Establishment of an ex-post control system that reflects the performance in budgeting reflects the performance in budgeting –1/3 of budgetary programs are evaluated and reflected (unit : trillion won) ’06 (555 projects) ’07 (577 projects) budget Change to the previous year budget Total34.233.5-1.7 Effective2.00.50.930.04 Mod effective9.31.33.50.2 Adequate20.3-1.328.6-1.3 Ineffective2.6-1.50.5-0.6

8. 7  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 3-3. Program Budgeting Program Budget NFMP (MTEF) PMS Top- Down Budget

9. 8 3-4. Top-down Budgeting(1) Budget Range Bottom-up : expenditure of program A goes to T, and spending of program B goes to T R Top-down : expenditures of program A and B go to 2 times ß ￣

10. 9  Basic Hypothesis –Cost function –Utility function of line ministry –Scale of budget –Net value –Total Value Theoretical background of Top-down budgeting(1) Theoretical background of Top-down budgeting(1)

11. 10  Incentive compatibility(IC) and Individual rationality(IR)  Maximized condition  Optimized budget Theoretical background of Top-down budgeting(2) Theoretical background of Top-down budgeting(2)

12. 11 3-4. Top-down Budgeting(2) Enhancing accountability of line ministries Actual case of Bottom-up → Top-down : Ministry of Maritime Affairs and Fishery

13. 12  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)

14. 13  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)

15. 14  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  How to harmonize the top-down budget and deliberation process 4. Challenges to MTEF and Top-down Budget (3)

16. 15 Top-downBottom-up Ex) Behavior Changes in Requesting Budget from Line Ministries

17. 16 Thank You