Introduction to MTEF
in Korea
Doyoung Min
The World Bank
Public Expenditure

Public Expenditure Analysis (PEA)
• “What” is to be done

Public Expenditure Management (PEM)
• “How” it is to be done
2
Public Expenditure Analysis

The role of the state

Public spending and budget deficit

Efficiency

Equity

Fiscal decentralization
3
Public Expenditure Management

MTEF
• Linking policy, planning and budgeting

Performance management

Integrated Financial management information
system (IFMIS)

Fiscal transparency
4
Medium-Term
Expenditure Framework
Background of MTEF

Changing role of budgeting
• from control (spending) to management (policy)

Increasing difficulty of maintaining fiscal soundness
• slowed economic growth, built-in entitlement

Growing demand for public spending
• aging population, education, social welfare

Demand for more democratized and transparent
budgeting process
6
Objectives of MTEF

Integrating national policy priorities
into annual budget

Providing medium-term perspective
on expenditure plan

Enhancing operating efficiency with increased
LMs’ discretion over their spending

Strengthening feedback and accountability
mechanism by performance management
7
International Experiences (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
All spending items
Australia
4 yrs
CBO
All spending items
NZ
2 yrs
MOF
All spending items
Netherlands
4 yrs
CPB
All spending items
Norway
varying
MOF
No
USA
N/A
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
8
International Experiences (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
MTEF
MOF
No
Australia
MTEF
Cabinet
No
NZ
MTEF
Cabinet
No
Netherlands
MTEF
Cabinet
Yes
Norway
N/A
Cabinet
Yes
USA
Suggestion only
President
Yes
Source: OECD-World Bank Budget Practices and Procedures Database
9
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
10
MTEF in Korea
Budgeting in the Past

Centralized and itemized budgeting
• Input control

High reliance on bottom-up approach

MPB’s deep involvement in program budgeting

Lack of macro perspectives

Separated, individual fiscal initiatives
12
Past Fiscal Reform Efforts

Strengthen linkage between formulation
and execution

Bring in incentive system for expenditure savings

Pilot performance-based budgeting

Introduce double-entry accounting system

Improve aggregate expenditure control

Introduce ex-ante evaluation system
for major projects
13
Recent Fiscal Reform Initiatives

2003: Design and preparation of PEM reform
• NFMP, Top-down, Performance management

2004: Implementation of a series of fiscal reform initiatives
• National Fiscal Management Plan


covers 5 years on a rolling basis
includes General account, Special accounts, and Funds
• Top-down budgeting

MPB gives sectoral ceilings to LMs
• Performance management

Program budgeting
• Digital budget and accounting system

2005: Strengthen the link among reform initiatives
• FY06 budget prepared through new PEM system
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Korea’s MTEF

NFMP + Top-down

Benchmarked Swedish model

MPB’s initiatives / Champion
• Track-record: Economic Planning Board (1961-1994)

planning and budgeting functions reside under one roof

Strong leadership (President) was backed up

Lack of Parliament’s participation
15
New Budget Process (1)

Stage I : Macroeconomic Forecasting and
Long-term Fiscal Management Planning
• Forecast macro variables for fiscal policy purpose
• Consider social, political and international factors
• Strengthen MPB’s role

consult with MOFE, Bank of Korea and
public/private research institutes

strengthen MPB’s capacity of macroeconomic analysis and
institutional coordination
16
New Budget Process (2)

Stage II : Fiscal Targeting, Budget Envelope,
and Sectoral Allocation
• Fiscal targeting based on macro variables and
policy objectives
• Set out budget envelop with updated cost estimates
• Sectoral allocation according to national policy priority,
previous year’s performance information, and
unexpected events
* Sectoral categories vary by country
Sweden(27), Canada(10), Norway(by Ministry)
17
New Budget Process (3)

Stage III : Cabinet Meetings
• Prepared by MPB in consultation with President

Budget envelop

Sectoral ceiling

Major national policies
• 2-day Cabinet meeting for consensus building
(held on April 30 and May 1 for FY06 budget)
18
New Budget Process (4)

Stage IV: Line Ministries’ Requests
• Line ministries prepare budget request within provided
sectoral ceiling

In line with sectoral policy priority

Increased discretion
• MPB’ guidelines for formulating budget proposal

Tools for consistent budget presentation, analysis, statistics

Gradual phase-out of interventional aspects
19
New Budget Process (5)

Stage V: Review and Documentation
• MPB reviews LMs’ budget request

checking the sectoral ceiling

examine programs according to agreed sectoral priorities
• MPB’s active interaction with line ministries
• Sufficient involvement of the President
in budgeting process
20
MTEF Process
Macroeconomic
forecasting
Fiscal
Target
Updated cost
estimate of
existing
policy/program
Total
Expenditure
Setting
For multi
years
New sectoral
demand for t+2
(priority/cost)
Sectoral
Ceiling
Setting for
multi years
Annual
Budget
Formulation
Sectoral
Budget
Preparation
21
Changes Made

Medium-perspective on expenditure framework
• NFMP + annual budgeting

Focus on Performance Management
• Created Performance bureau

Organizational Restructuring
• Matrix: Function and Sector
• Strengthened Strategic Planning role

Address budgetary basics
• Budget and Accounting Reinvention Office
• Introduce Program budgeting
• IFMIS
22
Challenges Remained (1)

Integration of NFMP to annual budget
• Annual budget should be the first year budget of NFMP

Macro-forecasting capacity
• MPB’s internal capacity building
• Cooperation between MPB and MOFE

Bank of Korea, research institutes
• International cases: UK, Sweden, and France
23
Challenges Remained (2)

Players’ willingness and commitment
• Understanding of PE and MTEF

MPB’s proper guideline for LMs
• Identification of new roles


Autonomy and Accountability: MPB and LMs
Change of organizational culture in addition to
organizational restructuring
• Performance-oriented
• Comprehensive government reform including
civil service system
24