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Linking Policy, Planning and Linking Policy, Planning and Budgeting :Budgeting :

Korean Experience and ChallengesKorean Experience and Challenges

February 6, 2007February 6, 2007

Kang Ho Lee (Kang Ho Lee (klee21@mpb.go.krklee21@mpb.go.kr) )

Director, Growth Strategy DivisionDirector, Growth Strategy Division

Ministry of Planning and BudgetMinistry of Planning and BudgetRepublic of KoreaRepublic of Korea

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1. Background of Fiscal 1. Background of Fiscal Reforms in KoreaReforms in Korea

Forecasting on Forecasting on additional spending additional spending in the futurein the future– Need extra resources, 1,100 trillion won for Need extra resources, 1,100 trillion won for vision 2030vision 2030

ReallocationReallocation of expenditure between economic and of expenditure between economic and social welfare resulted in aging and polarization social welfare resulted in aging and polarization problemsproblems

– social welfare as % of total expenditure :social welfare as % of total expenditure :

9.9% (1980) → 25.2% (2005) 9.9% (1980) → 25.2% (2005) 40.0% (2030) 40.0% (2030)

– % of the population over 65: 7.2% (2000) % of the population over 65: 7.2% (2000) 14.4%(2019) 14.4%(2019) 24.1%(2030) 24.1%(2030)

Increasing Increasing national debts national debts after 1997’s Korean financial after 1997’s Korean financial crisiscrisis

– % of GDP : 12.3(1997) % of GDP : 12.3(1997) 23.0(2003) 23.0(2003) 33.4(2006) 33.4(2006)

Need to enhance the efficiency in public spendingNeed to enhance the efficiency in public spending

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Extra resources in need : 2% of GDP (avg] Extra resources in need : 2% of GDP (avg]

Total Expenditure

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 Resources1-1. Forecast of Fiscal Resourcesin Vision 2030in Vision 2030

420202010200019901980

0.0

10.0

20.0

30.0

40.0

50.0ratio of budget

20302005

EconomyEconomy

welfarewelfare

1-2. The Change of Resource Allocation1-2. The Change of Resource Allocationin Vision 2030in 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 1-3. National Debt Ratio of GDP since 1997since 1997

30

25

20

15

10

5

0

-5

Ratio(%)

’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ‘10

33.4 32.923.0

12.3

18.6

33.2

32.3 31.3

National Budget Support to Economic Crisis(￦ 49

Trillion)

IMF Economic Crisis

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2. Framework of Major Fiscal 2. Framework of Major Fiscal Reforms Reforms

Top-downBudgeting

System System

Increasedefficiency

Enhanced linkage

OperationOperation

Building an advanced Public Expenditure Management System

NationalFiscal Management

Plan

NationalFiscal Management

Plan

PerformanceManagement

LegalFrame-work

NationalFiscal

Act in 2006

Program Budget Program Budget

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President has initiated budget reforms in 2003President has initiated budget reforms in 2003 MPB has taken actions on budget reforms after thatMPB has taken actions on budget reforms after that Congress passed the National Fiscal Act last yearCongress passed the National Fiscal Act last year Lots of discussion between MPB and line ministries Lots of discussion between MPB and line ministries

2-1. What organization is 2-1. What organization is responsible for budget responsible for budget

reforms?reforms?

Congress Line Ministries

President

MPB (Budget M)

<History of budget ministry><History of budget ministry> EPB (Deputy Prime M), 1960s~1994EPB (Deputy Prime M), 1960s~1994 MOFE (Deputy Prime M), 1994~1998MOFE (Deputy Prime M), 1994~1998

MPB (Minister), 1998~presentMPB (Minister), 1998~present

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3. Linking Budget to Plans3. Linking Budget to Plans

Discordance of 2007 budget between ’06~’10 NFMP Discordance of 2007 budget between ’06~’10 NFMP and’04~’08 NFMPand’04~’08 NFMP

– Difference of total expenditures : 1.8%Difference of total expenditures : 1.8%– Difference of Revenue : 4.4%Difference of Revenue : 4.4%

3-1. NFMP(MTEP)3-1. NFMP(MTEP)

(unit : trillion won)

2007 Budget in NFMPs2007 Budget in NFMPs

’’04~’08(2004)04~’08(2004) ’’05~’09(2005)05~’09(2005) ’’06~’10(2006)06~’10(2006)

Expenditure 234.2 234.8 238.5

Revenue 263.0 253.6 251.8

Managed fiscal balance(Ratio of GDP, %) 0.3 1.1 1.5

National Debt(Ratio of GDP, %) 28.8 31.7 33.4

GDP growth rate 5% 4.9% 4.6%

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Program budget is a critical “building block” to link Program budget is a critical “building block” to link NFMP, Top-down budgeting, and PMS in a wholeNFMP, Top-down budgeting, and PMS in a whole ProcessProcess

– For NFMP: provide program initiatives toFor NFMP: provide program initiatives to

represent medium-term national prioritiesrepresent medium-term national priorities

– For Top-down Budgeting: provide theFor Top-down Budgeting: provide the

consultative bases to decide expenditureconsultative bases to decide expenditure

ceilings between line ministries and MPBceilings between line ministries and MPB

– For Performance Management System:For Performance Management System:

provide the units to link resources and resultsprovide the units to link resources and results

3-2. Program Budgeting3-2. Program Budgeting

Top-DownBudget

PMS

NFMP(MTEF)

ProgramBudget

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①① Low incentives from performance evaluationLow incentives from performance evaluation

②② Too focused on the adequate category Too focused on the adequate category (85% of 2007 budget)(85% of 2007 budget)

③③ Difference between evaluating year and reflecting yearDifference between evaluating year and reflecting year

④④ Difficulties in building effective evaluation indexDifficulties in building effective evaluation index

4. Challenges to Performance 4. Challenges to Performance Management System(1) Management System(1)

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①① Align the annual budget classification with the Align the annual budget classification with the classification in the NFMPclassification in the NFMP

②② Keep programs within the organizational structureKeep programs within the organizational structure

③③ Combine all activities according to program objectives Combine all activities according to program objectives regardless of revenue sourcesregardless of revenue sources

④④ Simplify the grouping of object levelsSimplify the grouping of object levels

4. Challenges to Program Budget 4. Challenges to Program Budget (2)(2)

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①① Time constraint on the MTEFTime constraint on the MTEF

②② How to meet expenditure ceilings How to meet expenditure ceilings

③③ Mainly focused on the next year budgetMainly focused on the next year budget

④④ Unit in setting expenditure ceilings : Unit in setting expenditure ceilings :

program or subsectionprogram or subsection

⑤ ⑤ How to harmonize the top-down budget and How to harmonize the top-down budget and deliberation process deliberation process

4. Challenges to MTEF and4. Challenges to MTEF andTop-down Budget (3)Top-down Budget (3)

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Thank YouThank You

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MaintainingGrowth

Momentum

MaintainingGrowth

Momentum

UpgradingHuman

Resources

UpgradingHuman

Resources

AdvancedSocial Welfare

System

AdvancedSocial Welfare

System

New Social Capital

New Social Capital

All-out Globalization

All-out Globalization

Overall SchemeOverall Scheme

Innovative, vibrant Economy

Innovative, vibrant Economy

Stable, posed Nation

Stable, posed Nation

Safe, equitableSociety

Safe, equitableSociety

Korea: New Stride of Hope for New Opportunities

Institutional

Reforms

Proactive

Investment

VisionAction Plan

Vision

Goals

Strategy

Vehicles

Overall Scheme of Vision 2030