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Linking Policy, Planning and Budgeting : Korean Experience and Challenges February 6, 2007 Kang Ho Lee ([email protected]) Director, Growth Strategy Division Ministry of Planning and Budget Republic of Korea 0 1. Background of Fiscal Reforms in Korea Forecasting on additional spending in the future – Need extra resources, 1,100 trillion won for vision 2030 Reallocation of expenditure between economic and social welfare resulted in aging and polarization problems – social welfare as % of total expenditure : 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 – % of GDP : 12.3(1997) 23.0(2003) 33.4(2006) Need to enhance the efficiency in public spending 1 1-1. Forecast of Fiscal Resources in Vision 2030 Extra resources in need : 2% of GDP (avg] More Spending w/o Inst. Reform Total Expen diture Savings from Inst. Reform under Vision 2030 3% of GDP 2% of GDP Current System 2 1-2. 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) ratio of budget 50.0 welfare 40.0 30.0 20.0 10.0 Economy 0.0 1980 1990 2000 2005 2010 2020 2030 3 1-3. National Debt Ratio of GDP since 1997 Ratio(%) 33.2 30 23.0 33.4 32.9 32.3 31.3 25 18.6 20 15 National Budget Support to Economic Crisis(₩49 Trillion) 12.3 10 IMF Economic Crisis 5 0 -5 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ‘10 2. Framework of Major Fiscal Reforms System Top-down Budgeting Program Budget Performance Management National Fiscal Management Plan Increased efficiency Operation Enhanced linkage Building an advanced Public Expenditure Management System Legal Framework National Fiscal Act in 2006 5 2-1. What organization is responsible for budget reforms? President has initiated budget reforms in 2003 MPB has taken actions on budget reforms after that Congress passed the National Fiscal Act last year Lots of discussion between MPB and line ministries President MPB (Budget M) Congress Line Ministries <History of budget ministry> EPB (Deputy Prime M), 1960s~1994 MOFE (Deputy Prime M), 1994~1998 MPB (Minister), 1998~present 6 3. Linking Budget to Plans 3-1. NFMP(MTEP) Discordance of 2007 budget between ’06~’10 NFMP and’04~’08 NFMP – Difference of total expenditures : 1.8% – Difference of Revenue : 4.4% (unit : trillion won) 2007 Budget in NFMPs ’04~’08(2004) ’05~’09(2005) ’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% 7 3-2. Program Budgeting 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 NFMP (MTEF) – For Top-down Budgeting: provide the consultative bases to decide expenditure ceilings between line ministries and MPB Program Budget Top-Down Budget PMS – For Performance Management System: provide the units to link resources and results 8 4. Challenges to Performance Management System(1) ① Low incentives from performance evaluation ② Too focused on the adequate category (85% of 2007 budget) ③ Difference between evaluating year and reflecting year ④ Difficulties in building effective evaluation index 9 4. Challenges to Program Budget (2) ① Align the annual budget classification with the classification in the NFMP ② Keep programs within the organizational structure ③ Combine all activities according to program objectives regardless of revenue sources ④ Simplify the grouping of object levels 10 4. Challenges to MTEF and Top-down Budget (3) ① Time constraint on the MTEF ② How to meet expenditure ceilings ③ Mainly focused on the next year budget ④ Unit in setting expenditure ceilings : program or subsection ⑤ How to harmonize the top-down budget and deliberation process 11 Thank You 12 Overall Scheme of Vision 2030 Overall Scheme Vision Korea: New Stride of Hope for New Opportunities Goals Innovative, vibrant Economy Safe, equitable Society Strategy Maintaining Growth Momentum Advanced Social Welfare System Vehicles Institutional Reforms Upgrading Human Resources Vision Action Plan Stable, posed Nation New Social Capital All-out Globalization Proactive Investment 13