Korean Case - MTEF

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PUBLIC FINANCE

Korea Case - MTEFMAY 1, 2012

YOUNG KYU KANGSENIOR PUBLIC SECTOR SPECIALIST

WORLD BANK PRMPS


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Contents

Why Korea?

- Fiscal Consolidation and Uniqueness

Features of Korean MTEF

- MTEF introduction- Relationship with other PFM

Lessons from Korean MTEF

- Ownership

- Going Public- Continuous updating


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Fiscal Consolidation has been and will be restoredquickly after Global Financial Crisis

Why Korea?FISCAL CONSOLIDATION

MTEF is the critical tool for restoring Fiscal Consolidationwhile supporting national agenda such as Green Growth

-6

-4

-2

0

2

4

ConsolidatedFiscal Balance

ManagerialFiscal Balance*

Source: 2011-2015 NFMP, MOSF

* MFB=CFB-Balances of 4social insurance fundssuch as National PensionFund2011-2015 NFMP

% of Fiscal balance/GDP


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Big Bang, not platform approach

Why Korea?UNIQUENESS

Introductionstyle

MTPF (stage 3)MTEF stage

Due to Koreas sound PIM system and the simultaneous

introduction of PBB and MTEF, not only was Big bang

reform possible but also the jump of MTEF stage fromMTFF to MTPF

Sound fiscal consolidation was key factor to overcomefinancial crisis in 1997 and 2008


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Features of Korean MTEF- Introduction stages -


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Budget Office initiated MTEF introductionby persuading stakeholders

To consider future expenditure needs inSocial Welfare and the need to allocate

resources strategically MTEF (with Top-down budgeting, PBB)

Without specific fiscal reforms for decades,the reforms happened from 2004-2007

By empowering budget formulationauthority to LMs and appealingdecentralization to the public and politicalstakeholders

Features of Korean MTEF?1. MTEF INTRODUCTION

Who

Why

What

When

How


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Ref: Incentives to stakeholders

Budget Office

Internal Staff

President

Assembly

LineMinistries

-Transparency(aligned with the philosophyof political regime)

-Strategic ResourceAllocation

-Fiscal consolidation-Transparency

The Public/Experts

-Control(Tool for supportingnational agendas fiscally)

-Empowerment(BO will respect LMs budgetrequest within the ceiling)

-StrengtheningPolicy initiatives

(while empowering

budget authority toLMs)

-FiscalConsolidation

-Certainty in budget allocation


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As MTEF was introduced, Top-Down Budgeting wasrequired, and these two reforms initiated PBB

Fiscal Reforms closely connected with each other andfunction harmoniously

MTEFTop-Down

PBB(PART/In-Depth Study)

IntegratedFMIS

(from Bottom-up)

Changes in budget Calendar

Annual budgeting

Features of Korean MTEF2. RELATIONSHIP WITH OTHER PFM


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Lessons from Korean MTEF- Operation stages -


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The President and Cabinet endorse MTEF

Budget authority

- maintain MTEF even in Global Financial Crisis

- try to keep fiscal balance target and fiscal support fornational agenda as envisaged in MTEF by restructuringexpenditures through prioritization*

* Ineffective Program by PART result will be cut by 10%

comparing with last years budget

System itself does not verify success,

Ownership does matter

Lessons from Korean MTEF1. OWNERSHIP


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(Trillion Korean Won, % of GDP)

Source: MOSF NFMPs

Category MTEF 2010 2011 2012 2013 2014 2015

Revenue 2011-2015(A) 314.4 344.1 375.7 395.8 415.3

2010-2014(B) 290.8 314.6 342.9 365.1 390.9

2009-2013(C) 287.8 309.5 337.6 361.7

Gap(A-C) 4.9 6.5 14.0

Expenditure 2011-2015(D) 309.1 326.1 341.9 357.5 373.1

2010-2014(E) 292.8 309.6 324.8 337.7 353.0

2009-2013(F) 291.8 306.6 322.0 335.3

Gap(D-F) 2.5 4.1 6.6

Consolidated 2011-2015(G) 0.4 1.3 2.3 2.4 2.5

Fiscal 2010-2014(H) -0.2 0.4 1.3 1.9 2.5

Balance 2009-2013(I) -0.4 0.2 1.2 1.9

Gap(G-I) 0.2 0.1 0.4

Ref: Comparison of last 3 MTEFs

-Conservative Revenue forecast-Increase in expenditure is well below that of revenue-With this effort fiscal balance is getting better than last MTEF


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MTEF and annual budgeting proceduresinvolve participation from both experts and thepublic through public hearing or discussion on

major fiscal agenda while making MTEF Give Justification to MTEF

When MTEF is submitted to the Assembly it is

informed to the public Play a constraint to the stakeholders

Lessons from Korean MTEF2. PARTICIPATION AND GOING PUBLIC


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Since the introduction of MTEF in 2004, whenever thereare challenges in MTEF, Budget office amends and updatesMTEF

- Example 1: Some LMs announced new plan withoutcoordination with MTEF, and the completion of MTEF was

threatened In 2008 the Budget office added prior coordination withMTEF rule in the National Fiscal Management Law

- Example 2: Initially the Budget office allocated 5 yearresource allocation on every project while making MTEF.This practice was not only time-consuming but also

redundant between MTEF and annual budgeting from LMs Budget office only forecast major projects and

fluctuating projects while treating other projects on lumpsum

Initial MTEF cannot be perfect

Lessons from Korean MTEF3. CONTINUOUS UPDATING


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Thank you

Young Kyu Kang

Senior Public Sector SpecialistWorld Bank PRMPS

[email protected]

Office phone: 1 (202) 458-9451
mailto:[email protected]:[email protected]


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Ref: MTEF & Budgeting Calendar

1

2

3

4

5

6

7

8

9

10

11

12

Before MTEF Introduction After MTEF Introduction

- Budget Formulation(without ceiling)

- MOSF submit BudgetDraft to the Assembly

- Assembly Review

-BudgetFormulation(with ceiling)

-Submit tothe Assembly

-MTEF T/FTeam Work

-FinalizingMTEF

-Submit tothe Assembly

MTEF

Preparation (LMs)

MTEF Draft (BO)-Coordination(BO/LMs)-Cabinet Meeting-Ceiling informed to LMs

Budget Draftby LMs

- AssemblyReview

No official process-BO checks major on-going and new projectsinternally-LMs request next yearbudget on May 31

Month


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Ref: MTEF and Annual Budget Process 1

January 3 MOSF (Budget Office) sends the guideline for rollingMTEF to LMs- Guideline covers how and in what case resourcecan be increased

MOSFLMs

January 31 LMs request new MTEF plan to MOSF- Considering changes in Economic & Social situationand new national agenda, LM request new MTEF draftLMsMOSF

Feb - Apr MOSF makes MTEF draft through coordination with

LMs- MTEF T/F teams are organized and research is initiated onthe policy direction of resources allocation.

- Public hearing executed- Fiscal Strategic Cabinet Meeting endorse sectoralallocation & Ceilings to LMs while discussing fiscal and

national issues

MOSF/LMs


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Apr 30 MOSF (Budget Office) sends Budget call circularand the ceilings to LMs- Budget call circular covers economic condition forecast andresource allocation direction

- Next years expenditure in MTEF are set as ceilings(Ceilings for sectoral, entities and some major project)

MOSFLM

May - June LMs formulate their own budget draft- Considering changes in Economic & Social situationand new national agenda, LM request new MTEF draftLM

June 30 LMs request next year budget to MOSF- Considering the ceilings informed, LMs make budget draft

LM MOSF


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July-Sept MOSF settle the budget for each project withconsultation with LMs considering MTEF T/Frecommendation- Budget review committee in Budget office decide final

allocation- After MTEF introduction Budget office review only somemajor and important projects while checking whethernational agenda are properly supported(Ceilings for sectoral, entities and some major project)

- MTEF is finalized by adjusting with annual budget andreflecting MTEF T/F teams suggestions

- With MTEF introduction, the budget coordination periodwas shortened by a month whereas LMs Budgetformulation period extended by a month

MOSF/LM


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Oct-Dec 2 Assembly finalize budget through each standingcommittee and Budget committee

Assembly

December MOSF submit Budget Draft to Assembly- Under the finalized budget MOSF set disbursement planby matching revenue and expenditure scheduleMOSF/LMs

Oct 2 MOSF submit Budget Draft to Assembly forfinalization and MTEF for information

- With meetings with stakeholders like fiscal experts, LMsand local governments, Budget office finalize budget draft

MOSF


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Ref: Contents of Korean MTEF

Detailplan bysectors

- 16 areas (R&D, SOC, Social Welfare etc.) covered-Each sector consists policy direction and theannual size of resources-Major projects detail investment plan commented

Overview -Fiscal Policy direction and future goal-Economic forecast based on internal and externalconditions Growth rate forecast Revenue

forecast-Integrated Expenditure forecast consideringnational agenda and other policy supports-Government debt and Fiscal Balance forecasts-Ratio of tax against national income-Sectoral expenditure allocation plan


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How to decide fiscal envelopeINTEGRATION OF TOP-DOWN AND BOTTOM-UP

T/F teamsExternal expert

BudgetOffice

Economic PolicyBureau

TaxOffice

Economicforecast

Revenueforecast

Expenditureforecast

Growthforecast

Tax revenue forecast

FiscalTargeting

Ceilings

Line ministries

Expenditure requests

Korean Case - MTEF

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