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Top-down Budgeting. A Tool for Central Resource Management December 15, 2006. 2006 OECD Asian SBO. Korea Institute of Public Finance John M Kim, PhD Outline. What is it? Why do it? How to do it? Caveats. What is Top-down Budgeting?. It is not: Bottom-up Budgeting

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Top down budgeting

Top-down Budgeting

A Tool for Central Resource Management

December 15, 2006

2006 OECD Asian SBO

Korea Institute of Public Finance

John M Kim, PhD


  • What is it?

  • Why do it?

  • How to do it?

  • Caveats

What is top down budgeting
What is Top-down Budgeting?

  • It is not: Bottom-up Budgeting

    • Traditional way of budgeting

    • Sum of ministry budgets  Total budget

      • Difficult to control aggregates (total budget, deficit)

      • Difficult to control allocation among major sectors

        • Defense vs. pollution control vs. infrastructure, etc.

    • Additional Problems

      • Focus on annual numbers (myopic)

      • Inefficient process

        • Iterative negotiations (game-playing & adjusting for totals)

        • Inability to utilize ministries’ expertise

What is top down budgeting 2
What is Top-down Budgeting? (2)

  • It is:Budgeting in 2 Steps

    • Ceilings (aggregate numbers)

      • Decide total spending & deficit levels (agg. ceiling)

      • Decide allocation among major policy areas (sectoral ceilings: about 30)

        • Defense vs. pollution control vs. infrastructure, etc.

    • Intra-sectoral allocations (details)

      • Ministry/agency budgets

What is top down budgeting 3
What is Top-down Budgeting? (3)

  • It is:ADivision of Roles/Responsibilities

    • Ceilings (aggregate numbers)

      • Final decision by PM & Finance Minister

      • Focus on

        • Aggregate fiscal management

        • Medium-term perspective (multi-year ceilings)

        • Policy priorities

    • Intra-sectoral allocations (details)

      • Ministries formulate their own budgets

      • But must follow rules

What is top down budgeting 4
What is Top-down Budgeting? (4)

  • It is:

    • Effective for fiscal consolidation

    • A key tool for enforcing MTEF (NFMP) decisions

      (ceilings are often multi-year limits)

    • Ensures spending is aligned with priorities

    • Efficient in time and effort

    • Utilizes ministries’ expertise


  • What is it?

  • Why do it?

  • How to do it?

  • Caveats

Urgency of reform
Urgency of Reform?

  • Huge deficits ca.1990 in many OECD countries forced them to adopt major fiscal reforms

Different motivation for korea
Different Motivation for Korea

  • Top-down adopted as key part of 4 fiscal reforms

    • Need for longer-term perspective

      Anticipate need for controlling future spending growth in social welfare, etc.

    • Efficiency

      • Need to focus on broader policy priorities

      • Eliminate unproductive games in budget negotiations

      • Utilize ministries’ expertise

    • Need to focus on performance management, rather than controlling inputs

What are korea s 4 reforms
(What are Korea’s 4 Reforms?)

  • National Fiscal Management Plan

    • Medium-term (5-year) fiscal plan for 14 sectors

  • Top-Down budgeting

    • Tier 1: Fixed spending envelope for each sector/ministry

    • Tier 2: Autonomy for line ministries in own budgets

  • Performance Management

    • Assess performance of spending programs

    • Enhance link between performance and budget

  • Digital Budget and Accounting System

    • Program Budgeting

    • Accrual Accounting

    • Computerization of accounting system

Why the 4 reforms
(Why the 4 Reforms?)

  • Anticipate fiscal difficulties driven by aging & other socioeconomic changes

    • Population aging and low fertility rate

      • Old population (65 and above): 7.2 (2000)  14.4(2019)

      • Total fertility rate: 6.0(1961)  2.1(1982)  1.19(2003)

      • Less workers must support welfare of more elderly people Public pensions and health care financing will suffer most

    • Society demands better quality of life (social welfare, education, culture, environment)

    • Economic growth slowing down  so will tax revenues

    • Emphasis on participation and transparency

  • Spending growth may outrun revenue increase, so try to get fiscal system in good shape before it’s too late

Some background current fiscal status
(Some Background: Current Fiscal Status)

  • Up to the financial crisis, Korea’s public finances were solid, thanks to two decades of balanced budgeting

  • Some deterioration resulted from coping against crisis (national debt more than doubled), but fiscal situation remains better than most other OECD countries

    What does this mean for the 4 Reforms?

  • Korea’s reforms are not driven by an immediate crisis, but this may end up somewhat undermining the momentum of the reforms

Top down vs bottom up
Top-down vs. Bottom-up

Comparison of Bottom-up & Top-down Approaches

Top down vs bottom up 2
Top-down vs. Bottom-up (2)

  • Top-down and bottom-up methods are complementary

    • Information for evaluating new initiatives

    • Program reviews for monitoring programs/activities

Approaches to Determining Expenditure Ceilings

○: actively used, △ : used as reference, - : not used


  • No more excessive budget requests

    • Increase rate of budget requests in the general account dropped significantly: 30.8%(’04)  11.7%(’05)  7.0%(’06)

  • Self-initiated restructuring of spending by line ministries

    • Restructuring of multi-year programs and introduction of new programs have nearly doubled


  • What is it?

  • Why do it?

  • How to do it?

  • Caveats

Budget formulation in bottom up vs top down systems

Y+5 (Sweden)



Budget Formulation in Bottom-up vs. Top-down Systems

  • Strategic resource allocation emphasized

Line Ministries


Budget Requests

( by line items)

Budget Formulation

(line item-oriented)





Line Ministries



and Review



Within Ceilings

 Total


 Sectoral




Determining expenditure ceilings
Determining Expenditure Ceilings (Sweden)

  • Overall Ceiling

    • Prudent Economic Assumptions (Growth, etc.)

      • Sensitivity analysis

      • Independent panel or private sector forecasting

      • Built-in bias for lower growth rate

    • 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

Determining expenditure ceilings 2
Determining Expenditure Ceilings (2) (Sweden)

  • Sectoral Ceilings

    • Must not affect overall ceiling

    • Usually overlaps with ministerial boundaries

      (good program budget design)

    • New initiatives may be required to be funded from savings from existing programs

Determining expenditure ceilings 3
Determining Expenditure Ceilings (3) (Sweden)

  • Operating/Capital Ceilings

    • Ministries tend to favor operating expenses

    • Denmark: separate ceilings for current & capital expenses

      • Sub-ceiling for salaries/wages in operating ceiling

    • UK

      • Current expenses: Golden Rule

      • Capital expenses: Sustainable Investment Rule

Determining expenditure ceilings 4
Determining Expenditure Ceilings (4) (Sweden)

  • 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

Determining expenditure ceilings 5
Determining Expenditure Ceilings (5) (Sweden)

  • Buffers against Contingencies

    • Built-in buffers in prudent forecasts

       Windfalls (repay debt, tax cut, 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

Determining expenditure ceilings 6
Determining Expenditure Ceilings (6) (Sweden)

  • Expenses in or excluded from ceilings?

    • Discretionary expenses usually included

    • Mandatory expenses (social security entitlements, etc., mandated by law)

      • Sweden, Korea, Chile, Netherlands: included

      • Canada, Denmark: excluded

    • Interest on debt

      • Sweden, Denmark: excluded

      • Chile, Netherlands, Korea: included

Determining expenditure ceilings 7
Determining Expenditure Ceilings (7) (Sweden)

  • 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

Outline (Sweden)

  • What is it?

  • Why do it?

  • How to do it?

  • Caveats

Conditions for top down budgeting
Conditions for Top-down Budgeting (Sweden)

  • Good monitoring system to compensate for delegation of authority to ministries

    • Performance & program reviews

    • Information system to monitor execution

  • Enhanced policy capacity + Behavioral change

    • Budget Office: better forecasts & projections, must be able to defend fiscal rules, but work better “together” with line ministries

    • Ministries: need to learn internal allocation decisions

  • Strong PM & Finance Minister

  • Commitment to rule-based budgeting (Fiscal Rules)

    • Remove arbitrariness in budgeting decisions, but leave room for flexibility and judicious discretion/autonomy

  • Support from the legislature

Remaining tasks korea
Remaining Tasks (Korea) (Sweden)

  • Areas for improvement

    • Consensus and understanding on the top-down system

    • Ex-ante consultations with line ministries when setting spending ceilings

    • Further expansion of autonomy at line ministries

    • Insufficient preparation and guidelines by MPB

  • Future plans

    • Surveys and consultations with line ministries

    • Sectoral and ministerial spending ceilings set after sufficient discussions

    • Active use of performance assessments to restructure spending programs

    • Detailed budget formulation guidelines

This ends the presentation (Sweden)

Thank You!