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

1. Medium-term Expenditure Framework- with Korea’s experience - Doyoung Min The World Bank Public Financial Management Workshop, Vientiane, Laos, May23-26, 2005

2. 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

3. Public Expenditure • Public Expenditure Analysis (PEA) • “What” is to be done • Public Expenditure Management (PEM) • “How” it is to be done

4. 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?

5. Public Expenditure Analysis (2) • 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)

6. 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

7. Key components of PEM • MTEF • Linking policy, planning and budgeting • Performance management • Integrated Financial management information system (IFMIS) • Fiscal transparency

8. Medium-Term Expenditure Framework

9. 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

10. 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

11. 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

12. MTEF Process (simplified) Updated cost estimate of existing policy/program Macro-economic forecasting Fiscal Target Total Expenditure Setting For multi years Sectoral Ceiling Setting for multi years Annual Budget Formulation New sectoral demand for t+2 (priority/cost) Sectoral Budget Preparation

13. 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

14. 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

15. International Trend (2) Source: OECD-World Bank Budget Practices and Procedures Database

16. 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

17. Korea’s Experience and Lessons

18. 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 Why MTEF?

19. 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

20. 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

21. 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

22. 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