Transcript Performance-Oriented Budgeting in Korea

Asian Regional Seminar: Promoting Fiscal Sustainability
February 28 – March 2, 2011, Kuala Lumpur, Malaysia
Nowook Park
Ohio State University &
Korea Institute of Public Finance
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I.
History of Public Financial Management
Reforms in Korea
II. Overview of Performance-oriented
Budgeting in Korea
III. Current Issues and Future Directions
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Budget process reforms are in full swing
among emerging and developing economies
under the auspices of international
organizations(IMF, World Bank, and regional
development banks)
Korea has gone through major reforms in
budget process during mid 2000s.
◦ Medium term expenditure framework
◦ Performance budgeting
◦ Digital budget & accounting system
 Korean case may provide useful lessons
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
Deteriorating fiscal situation
◦ Increasing government debt after 1997/1998 Asian
financial crisis
 From 10% level to 23% of GDP in 2003, 35% in 2010
◦ Increasing government expenditure
 Increasing social welfare expenditure due to increasing
income inequality and aging population
◦ Expected decreasing tax revenue
 Aging population
 Ratio of population above 65 yr. old move from 7.2% in
2000 to 14.4% in 2019

Political need & support from top leadership
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
Big bang approach with PFM reforms since
2003
◦
◦
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◦
Medium term fiscal plan (2003*, 2005**)
Top down budgeting (2003*, 2004**)
Performance budgeting (2000*, 2005**)
Digital budget and accounting system
 Program budgeting (2006**)
 Accrual accounting (2009*, 2010**)
 IT system (2007**)
(Note) *: pilot project, **: comprehensive
implementation
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2000 ~ 2002
Performance Budgeting (Pilot Project)
- Developed Strategic Goals, Performance Objectives
and Performance Indicators
- Designed after GPRA
2003 ~
Performance Goal Management System
- Expanded “Performance Budgeting” to all ministries and agencies
- Annual performance plan and report are required
2005 ~
Self-Assessment of Budgetary Program (SABP)
- 1/3 of major budgetary programs are evaluated every year
- Designed after PART
2006 ~
In-Depth Evaluation
- Selected programs are subject to program evaluation
- About 10 programs are subject to program evaluation
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Act was enacted in December, 2006
◦ To provide a legal basis for public financial
management reforms

Includes articles on PB
◦ Annual performance plan and report become legal
requirement for line ministries/agencies
◦ Program review & in-depth evaluation are
stipulated

It gives stability & continuity which tend to be
a problem to PB.
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Purpose of PB
◦ Emphasis on making link between performance
information & budget allocation
Going beyond performance monitoring system
Periodic review process is developed
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Outcome-oriented PB
Executive branch-initiated reform
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Performance monitoring
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Program review
◦ “Performance Goal Management”
◦ Monitoring based on the performance indicators
◦ Monitoring unit is program and sub-program
◦ “Self-Assessment of Budgetary Program”
◦ Review based on the checklist
◦ Review unit is usually sub-program

Program evaluation
◦ “In-depth Evaluation of Budgetary Program”
◦ Program evaluation for selected programs
◦ Evaluation unit is usually sub-program, but
cross-cut issues are sometimes evaluated
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Strategic plans
◦ Cover 3-5 year plans, should be updated at least 3
years

Annual performance plans
◦ Cover each program activity in the agency’s budget

Performance reports
◦ Include actual program performance results for the 3
preceding fiscal years
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Ministry of Strategy and Finance (MOSF) reviews selfassessment of programs done by line
ministries/agencies
Budgetary authority provides a standardized checklist
for reporting self-assessment
The checklist contains questions on program design,
performance management system, program
implementation, and actual performance
Entire program will be reviewed in three years.
◦ About 1/3 programs are reviewed each year
 About 300 sub-programs are reviewed each year
◦ Evaluation unit is usually sub-programs which are unit for
budget allocation by MOSF
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Design and
Planning
(30)
•
•
•
•
•
•
Program purpose
Rationale for government spending
Duplication with other programs
Efficiency of program design
Relevance of performance objectives and indicators
Relevance of performance targets
Management
(20)
•
•
•
•
Monitoring efforts
Obstacles of program implementation
Implementation as planned
Efficiency improvement or budget saving
Results and
accountability
(50)
• Independent program evaluation
• Results
• Utilization of evaluation results
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Based on social science approach
Evaluation refers to the activity of systematically collecting,
analyzing and reporting information that can then be used to
change attitude or improve the operation of a project or
program
Purpose of evaluation
◦ Challenge
◦ Improvement
Issues of evaluation
◦ Rationale, Measurement, Attribution
Benefit: Provide the most detailed and reliable info
Shortcoming: Expensive and takes long time
MOSF selects about 10 programs for in-depth evaluation each
year
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Performance
information
MOSF
Spending ministry
Enforce budget cut to
ineffective programs
Allocate budget based
on evaluation results
Provide
recommendations for
performance
improvement
vs
Introduce performance
information in their
program management
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Spending
ministries
MOSF
Submitted with budget :
annual performance plan
annual performance report
Assembly
Submitted with budget :
annual performance plan
annual performance report
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
Information from monitoring system (performance plan
and report) has not been systematically utilized so far.
◦ For internal use, they are useful information
◦ From the viewpoint of central budget authority, they
provide limited information

Information from review system are actively used in
budget negotiation process.
◦ Programs rated as ineffective are in danger of suffering
budget cut
◦ Its use is systematically built into the budget process

Information from program evaluation is usually useful
◦ Their use in budget process depends on the quality of
evaluation and the will of central budget authority
◦ It is not systematically utilized in the budget process
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
Evaluation results
◦ Quality of performance information has not improved
much
◦ Programs are showing better results

Link between evaluation results and budget
◦ Evaluation results are utilized at every stage of budget
process

Moving away from incremental budgeting
◦ Evaluated programs are subject to bigger budget
change compared to other programs

Cultural changes among line ministries
◦ Performance management becomes an essential
element of program management.
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(Number of Programs, %)
Effective
Moderately
Effective
Adequate
Ineffective
2005 555 (100)
28 (5.0)
100 (18.0)
340 (61.3)
87 (15.7)
2006 577 (100)
30 (5.2)
94 (16.3)
388 (67.2)
65 (11.3)
2007 585 (100)
69 (11.8)
143 (24.4)
342 (58.5)
31 (5.3)
2008 384 (100)
11 (2.9)
44 (11.5)
226 (58.9)
103 (26.8)
2009 346 (100)
5 (1.4)
14 (4.0)
257 (74.3)
70 (20.2)
2010 473 (100)
0 (0)
22 (4.7)
335 (70.8)
116 (24.5)
Total
20
4
2
0
-2
20
40
60
Total Score
80
100
95% CI
Fitted values
Growth of Budget Size based on Budget Request by Agency
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6
4
2
0
-2
20
40
60
Total Score
80
100
95% CI
Fitted values
Growth of Budget Size based on Budget Fomulation by MOSF
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4
2
0
-2
20
40
60
Total Score
80
100
95% CI
Fitted values
Growth of Budget Size based on Approved Budget at National Assembly
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15
10
5
0
-5
20
40
60
Total Score
80
100
95% CI
Fitted values
Growth of Budget Size based on Budget Request by Agency
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15
10
5
0
-5
20
40
60
Total Score
80
100
95% CI
Fitted values
Growth of Budget Size based on Budget Fomulation by MOSF
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There has been a clear link between review
results & budget allocation during 2005-2006.
However, their link became insignificant in 2007.
◦ Weakening zeal of MOSF and increasing strategic
behavior from line ministries
In response to this, MOSF raised threshold of
program ratings and, as a result, higher
proportion of programs was rated as ineffective
in 2008.
◦ However, the significance of link between evaluation and
budget allocation started to re-emerge in 2010.
◦ Fiscal situation played a role
 2008-2009: Fiscal Stimulus Package
 2010: Restoring Fiscal Sustainability
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Improving alignment among budget
classification (program structure),
organizational structure and policy goals
◦ Conflicts occurred among them partly due to big
bang approach and lack of communication between
budget unit and performance management unit.
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Revision of National Finance Act in 2009
includes new article requiring consistency
between budget classification and annual
performance plan/report.
Recently, efforts to improve the alignment are
being exerted
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Allocation of overhead costs became an issue
again due to introduction of accrual accounting
Their allocation are set aside for now
◦ Separate program, named as administrative support
program including salary and routine administrative
costs, are established to avoid the issue of allocating
overhead costs.
◦ Considering given inflexibility of human resource
management in Korea, this decision may be a practical
one.
◦ As the Korean system matures, we plan to pursue
overhead cost allocation .
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Current integrated fiscal information system
does not include comprehensive performance
information.
Recently, development of performance
information management system is being
considered.
◦ Its purpose is to improve on-going monitoring
efforts.
◦ Also, it may help systematic use of performance
information.
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The Role of high-level leadership is crucial
for the effective implementation of
performance management system
◦ Find ways to make management issues visible to
high-level leadership, politicians and general public.


Fiscal situation influences the extent to which
performance information is used.
Developing evaluation capacity among the
central budget authority and line ministries
are crucial to have effective performance
budgeting/management system.
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