Medium-term Expenditure Framework- with Korea’s experience -

Doyoung Min

The World Bank

Public Financial Management Workshop, Vientiane, Laos, May 23-26, 2005

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PE in World Bank

• Objectives of PE

– A critical ingredients in a country’s development– Poverty alleviation and creating an enabling

environment for the private sector

• PE issues in World Bank– In the WB matrix, PE covers every region and various

sectors such as Public Finance and PREM – Public expenditure issues touch on virtually every

aspect of the World Bank’s work

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Public Expenditure

• Public Expenditure Analysis (PEA)

– “What” is to be done

• Public Expenditure Management (PEM)

– “How” it is to be done

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Public Expenditure Analysis (1)

• The role of the state– Market failure and distributional inequity

Government intervention– Improving efficiency of economy/distribution of income

* Government failure vs. Market failure

• Public spending and budget deficit – How is the deficit measured?– What is the composition of deficit financing?– What is the sustainable amount of fiscal deficit?

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• Efficiency – Appropriate instrument for public intervention– Fiscal costs associated with public intervention– Impact of public intervention

• Equity– What are key distributional objectives of PE?– How PE best meet these objectives?– How assess welfare impacts of PE?

• Fiscal decentralization (Fiscal Federalism)

Public Expenditure Analysis (2)

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Basic Objectives of Public Expenditure Management

• Level 1: Aggregate Fiscal Discipline

(Budget totals as the result of explicit, enforced

decisions)

• Level 2: Allocative Efficiency

(Expenditure according to government priorities and

effectiveness of public programs)

• Level 3: Operational Efficiency

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Key components of PEM

• MTEF– Linking policy, planning and budgeting

• Performance management

• Integrated Financial management information system (IFMIS)

• Fiscal transparency

Medium-Term Expenditure Framework

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What is an MTEF?

• Conceptual framework for public finance systems– ties together multiple technical reforms– gives paradigm for understanding import of technical reforms

• Process, not only components of PEM systems– process of government decision-making– Multi-year emphasis

• Emphasizing policy– steering versus rowing for senior officials, organizations– linking policy, inputs, outputs, objectives

• Effort to change paradigm of actors in system

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Objectives of MTEF

• Improve macrofiscal situation– lower deficits, improved economic growth– more rational approach to retrenchment and economic

stabilization

• Improve impact of Government policy– link between government priorities/policies and government

programs

• Improve program performance/impact– Shift bureaucracy from administrative to managerial culture

• Managerial flexibility & innovation: lower cost/output; greater effectiveness of programs/policies

– Improved resource predictability

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MTEF: New Budget Process

• Stage 1. Macroeconomic and public sector envelopes

• Stage 2. High-level policy: aligning policies & objectives under resource constraints

• Stage 3. Linking policy, resources, and means by sector

• Stage 4. Reconciling resources with means

• Stage 5. Reconciling strategic policy and means

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MTEF Process (simplified)

Sectoral Budget

Preparation

Macro-economic

forecasting

Sectoral Ceiling

Setting for multi years

Fiscal Target

Total Expenditure

SettingFor multi

years

New sectoral

demand for t+2

(priority/cost)

Annual Budget

Formulation

Updated costestimate of

existingpolicy/program

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Implementing an MTEF

• Adopt framework– getting policy-official and technical staff buy-in– recognize this is continuous, long-term endeavor

• Customize implementation to country needs, initial conditions– macro, sectoral policy

• Target institutional capacity development

International Trend (1)

MOF: different part of MOF/Treasury, CBO: central budget office, CPB: Central Planning Bureau

Source: OECD-World Bank Budget Practices and Procedures Database

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

International Trend (2)

Source: OECD-World Bank Budget Practices and Procedures Database

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

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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

Korea’s Experience and Lessons

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Why MTEF?

• Short-term Perspective with Bottom-up Approach– Yearly based revenues and expenditures

– Weak linkage between national policy priorities and budgeting

• Future Fiscal Risk– Social welfare expenditure demands/rapidly aging population

• Inefficiency from Managerial Inflexibility– Limited autonomy to plan policy and implement budget

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New Budget Process (1)

• Stage I : Macro-economic Forecasting and

Long-term Fiscal Management Planning

– Macro-forecasting and review of national debt levels

• Stage II : Fiscal Targeting, Budget Envelope,

and Sectoral Allocation

– Macrofiscal targets, social/political demands– New sectoral demands and updated costs estimates– National policy priority

– Within total budget: zero-sum game

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New Budget Process (2)

• Stage III : Cabinet Meetings– Draft prepared by MPB in consultation with President

– 2-day Cabinet meeting for consensus building

(it was held on April 30 and May 1 for FY06 budget)

• Stage IV: Line Ministries’ Requests- Prepare budget proposals with MPB’s guidelines

• Stage V: Review and Documentation- Review line ministries’ requests for compliance with sectoral

limits and policy priorities

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Conclusion

• Generally, on the right track – MTEF along with other fiscal reforms: Performance

management, Program budgeting, and IFIMS

• Track Record of Linking Budgeting to Planning – Economic Planning Board (EPB), 1961-1994

• Strong Leadership: President and MPB– promote the National Reforms

• Well-trained technocrats

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Challenges remained

• Integrate NFMP with Annual budget

• Establish Performance management system– MTEF and Performance management

• Strengthen Macro-forecasting capacity– MPB and MOFE

• Capacity building: MPB and LMs

• Autonomy and Accountability– New role of MPB and LMs