Top-down Budgeting
A Tool for Central Resource Management
John M. Kim
Korea Inst. of Public Finance
jhrv@kipf.re.kr
Outline
1.
2.
3.
4.
5.
What is Top-down Budgeting?
Historical Background
Issues in Implementation
Prerequisites
Conclusion
Outline
1. What is Top-down Budgeting?
2.
3.
4.
5.
Historical Background
Issues in Implementation
Prerequisites
Conclusion
Top-down vs. Bottom-up
 Top-down
Bottom-up
 Problems of Bottom-up Budgeting
• Difficult to control aggregate spending
• Sectoral allocations may not be optimal
• Hard to keep multi-year perspective
• Inefficient formulation process
- Game-playing between budget office and line
ministries
- Ministries’ expertise under-utilized
4
Top-down: Procedurally Defined

Budgeting in 2 Steps
① Ceilings (aggregate numbers)
1) Decide total spending & deficit levels (agg. ceiling)
2) Inter-sectoral allocation among major policy areas
(sectoral ceilings: about 30)
② Intra-sectoral allocations (details)
1) Ministry/agency budgets
5
Top-down: Functionally Defined

Division of Roles/Responsibilities
① Ceilings (aggregate numbers)
1) Final decision by PM & Finance Minister
2) Focus on



Aggregate fiscal management
Medium-term perspective (multi-year ceilings)
Policy priorities
② Intra-sectoral allocations (details)
1) Ministries formulate their own budgets
2) But must follow rules
6
Benefits of Top-down Budgeting
① Effective for fiscal consolidation
② Easier to integrate with MTEF (MTBF)
(ceilings are usually multi-year limits)
③ Ensures spending is aligned with priorities
④ Efficient in time and effort
⑤ Utilizes ministries’ expertise
7
Outline
1. What is Top-down Budgeting?
2. Historical Background
3. Issues in Implementation
4. Prerequisites
5. Conclusion
Fiscal Crises as Motivation

Huge deficits ca.1990 in OECD countries
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
• Fiscal Balance (% of GDP)
Australia
-3.8
-6.0
-5.6
-4.6
-3.7
-2.2
-0.5
0.6
1.6
0.1
Canada
-8.3
-9.1
-8.7
-6.7
-5.3
-2.8
0.2
0.5
1.6
3.2
1.4
2.1
1.8
1.6
2.4
2.1
1.8
0.4
-1.4
0.1
-2.4
-2.2
-2.9
-2.4
-2.3
-1.0
0.4
1.1
3.2
2.5
1.8
1.4
2.5
3.1
4.2
3.8
3.6
1.9
3.1
6.9
-3.2
-4.4
-3.6
-4.2
-4.2
-1.8
-1.1
-0.8
0.4
2.2
-7.8
1
1
.
4
1
0
.
8
-7.7
-3.1
-1.6
2.1
1.3
3.7
UKtop-down
introduced
as-6.7tool-5.8
for fiscal
-3.1
-6.4
-7.9
-4.4 -2.2
0.4
consolidation
+ prevent
reoccurrence
OECD Avg.
-3.7
-4.6
-5.0
-4.2
-3.9
-3.2 -1.8 -1.4
1.1
1.6
-0.9
0.0
Chile
Denmark
Korea
Netherlands
Sweden
-2.0
9
A Different Motivation (Korea)

Top-down adopted as key part of 4 fiscal reforms
(multi-year, top-down, performance, program budgeting)
1) Emphasis on longer-term perspective
Need to control anticipated spending growth in social welfare, etc.
2) Efficiency
a. Need to focus on broader policy priorities
b. Eliminate unproductive games in budget negotiations
c. Utilize ministries’ expertise
3) Need to focus on performance management, rather
than controlling inputs
10
Top-down & Bottom-up Compared
• Bottom-up
• Top-down
- Ministry by ministry analysis that - Aggregate fiscal analysis that
largely ignores economic forecasts takes into account economic
forecasts
- Annual
- Multi-year
- Time consuming
- Delegated authority
- Ownership of proposals is more
agency- specific
- Creates joint ownership of
proposals
- Reactive
- Proactive
11
Complementary Approaches
•Top-down approach should be complemented by bottom-up methods:
- Information for evaluating new initiatives
- Program reviews for monitoring programs/activities
Approaches to Determining Expenditure Ceilings
Top-Down Approach
Overall
Sectoral
Ceiling
Ceiling
Bottom-Up Approach
Overall
Sectoral
Program
Ceiling
Ceiling
Review
Sweden
○
○
-
-
△
Netherlands
○
○
-
△
○
UK
○
○
-
△
○
Denmark
○
○
-
△
○
Korea
○
○
-
△
○
Canada
○
-
-
○
○
Australia
○
-
-
○
○
Chile
○
-
-
○
○
○ : actively used, △ : used as reference, - : not used
12
Outline
1. What is Top-down Budgeting?
2. Historical Background
3. Issues in Implementation
4. Prerequisites
5. Conclusion
Determining Spending Ceilings

Overall Ceiling
1) Prudent Economic Assumptions (Growth, etc.)
–
–
–
Sensitivity analysis
Independent panel or private sector forecasting
Built-in bias toward lower growth forecast
2) Fiscal Rules for Good Discipline
–
–
–
–
Sweden: structural surplus of 2% GDP
Chile: Structural surplus of 1% GDP
UK: Balance current budget over econ. cycle
Surplus automatically goes to repaying debt
14
Determining Spending Ceilings

Sectoral Ceilings
•
•
Must not affect overall ceiling
Usually overlap with ministerial boundaries
(good program budget design)
•
New initiatives may be required to be funded
by savings from existing programs
15
Issues in Setting Ceilings

Operating vs. Capital Ceilings
•
•
Ministries tend to favor operating expenses
Denmark: separate ceilings for current & capital
expenses
-
•
Sub-ceiling for salaries within operating ceiling
UK
-
Current expenses: Golden Rule
Capital expenses: Sustainable Investment Rule
16
Issues in Setting Ceilings

Number of Ceilings
•
•
Korea (200+) vs. Sweden (27)
Optimal number is around 30
-
•
More ceilings make budgeting decisions politically difficult
Need to give ministries room to exercise autonomy to
ensure their proactive participation
This means Budget Office needs better tools:
-
Performance management
Information system to monitor execution
Enhanced analytical capacity for policy assessment
17
Issues in Setting Ceilings

Buffers against Contingencies
•
•
Built-in buffers in prudent forecasts
 Windfalls (repay debt, tax cuts, etc.)
Budget Margin
-
-
Overall Ceiling = Sect. Ceilings + Budget Margin
Covers unexpected changes (forecasts errors,
etc.) and institutional reforms after ceilings were
fixed
Usually does not cover new policy initiatives
18
Issues in Setting Ceilings

Expenses Included in Ceilings?
1) Discretionary expenses usually included
2) Mandatory expenses (social security
entitlements, etc., mandated by law)
•
•
Sweden, Korea, Chile, Netherlands: included
Canada, Denmark: excluded
3) Interest on debt
•
•
Sweden, Denmark: excluded
Chile, Netherlands, Korea: included
19
Issues in Setting Ceilings

Funding for New Policy Initiatives
•
•
Sweden: must come from existing ceilings
Most countries have review process to judge
new initiatives  adjust ceilings
-
-
Australia, Canada: Cabinet committees
Netherlands, Denmark: simply verify fit with
coalition agreement
Chile: pooled “Bidding Fund” from savings on
obsolete or poorly performing programs
20
Outline
1. What is Top-down Budgeting?
2. Historical Background
3. Issues in Implementation
4. Prerequisites
5. Conclusion
Prerequisites for Success

Good monitoring system to compensate for
delegation of authority to ministries
•
•

Performance & program reviews
Information system to monitor execution
Policy capacity + Behavioral change
•
•
Budget Office: better forecasts & projections,
need to defend fiscal rules aggressively, but
work better together with line ministries
Ministries: need to learn internal allocation
decision-making
22
Prerequisites for Success

Strong PM & Finance Minister
•

Commitment to rule-based budgeting
•

Must be able to enforce ceilings
Remove arbitrariness in budgeting decisions,
but leave room for flexibility and judicious
discretion/autonomy
Support from the legislature
23
Outline
1.
2.
3.
4.
What is Top-down Budgeting?
Historical Background
Issues in Implementation
Prerequisites
5. Conclusion
Conclusion

Top-down budgeting is an effective approach to fiscal
consolidation
•
•
•

Political will comes foremost; Top-down provides effective
framework/tools
Framework fits well with multi-year fiscal discipline & rulesbased budgeting
But, discipline tends to slacken as public finances improve
Many countries find it useful to have:
•
•
•
•
•
About 30 sub-ceilings for optimal inter-sectoral allocations
Separate ceilings for operating and capital expenditures
Budget margins as buffers against contingencies
Some flexibility in adjusting ceilings for new policy initiatives
Exclusion of mandatory spending differs by country
25
Conclusion

Prerequisites for Success
•
From the Budget Office
-
•
Willingness to defend fiscal rules aggressively
Good monitoring + evaluation of spending programs
Better analytical capacity & ability to work together with ministries
From Line Ministries
-
•
Ability to prioritize and make own budgeting decisions
From PM & Finance Minister
-
•
Commitment to rule-based budgeting
Willingness/ability to enforce ceilings
From the Legislature
-
Support for rules and ceilings
26
Conclusion

Despite common features & principles, practices differ
by country. Some balance needs to be struck between
strict discipline and flexibility, especially at initial stage.
Top-down system by itself does not guarantee good
results

•
•
•

Political willingness to honor rules & principles is essential
Capacity of budget office (staff + systems) is also a major factor
Behavioral change must follow
But, overall, has delivered desired results in countries
that have adopted it
27
End of Presentation