Top-down Budgeting A Tool for Central Resource Management John M. Kim Korea Inst. of Public Finance...
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Transcript of Top-down Budgeting A Tool for Central Resource Management John M. Kim Korea Inst. of Public Finance...
Top-down Budgeting A Tool for Central Resource
Management
John M. Kim
Korea Inst. of Public Finance
Outline
1. What is Top-down Budgeting?2. Historical Background3. Issues in Implementation4. Prerequisites5. Conclusion
1.What is Top-down Budgeting?
2. Historical Background3. Issues in Implementation4. Prerequisites5. Conclusion
Outline
4
Top-down vs. Bottom-up
Top-down Bottom-up Problems of Bottom-up Budgeting
• Difficult to control aggregate spending
• Sectoral allocations may not be optimal• Hard to keep multi-year perspective• Inefficient formulation process
- Game-playing between budget office and line ministries
- Ministries’ expertise under-utilized
5
Top-down: Procedurally Defined
Budgeting in 2 Steps① Ceilings (aggregate numbers)
1) Decide total spending & deficit levels (agg. ceiling)2) Inter-sectoral allocation among major policy areas
(sectoral ceilings: about 30)
② Intra-sectoral allocations (details)1) Ministry/agency budgets
6
Top-down: Functionally Defined
Division of Roles/Responsibilities① Ceilings (aggregate numbers)
1) Final decision by PM & Finance Minister2) Focus on
Aggregate fiscal management Medium-term perspective (multi-year ceilings) Policy priorities
② Intra-sectoral allocations (details)1) Ministries formulate their own budgets2) But must follow rules
7
Benefits of Top-down Budgeting
① Effective for fiscal consolidation② Easier to integrate with MTEF (MTBF)
(ceilings are usually multi-year limits)
③ Ensures spending is aligned with priorities
④ Efficient in time and effort⑤ Utilizes ministries’ expertise
1. What is Top-down Budgeting?
2.Historical Background3. Issues in Implementation4. Prerequisites5. Conclusion
Outline
9
Fiscal Crises as Motivation Huge deficits ca.1990 in OECD countries
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
• Fiscal Balance (% of GDP)
Australia -3.8 -6.0 -5.6 -4.6 -3.7 -2.2 -0.5 0.6 1.6 0.1
Canada -8.3 -9.1 -8.7 -6.7 -5.3 -2.8 0.2 0.5 1.6 3.2
Chile 1.4 2.1 1.8 1.6 2.4 2.1 1.8 0.4 -1.4 0.1
Denmark -2.4 -2.2 -2.9 -2.4 -2.3 -1.0 0.4 1.1 3.2 2.5
Korea 1.8 1.4 2.5 3.1 4.2 3.8 3.6 1.9 3.1 6.9
Netherlands
-3.2 -4.4 -3.6 -4.2 -4.2 -1.8 -1.1 -0.8 0.4 2.2
Sweden -2.0 -7.8
-11.4
-10.8
-7.7 -3.1 -1.6 2.1 1.3 3.7
UK -3.1 -6.4 -7.9 -6.7 -5.8 -4.4 -2.2 0.4 1.1 1.6
OECD Avg. -3.7 -4.6 -5.0 -4.2 -3.9 -3.2 -1.8 -1.4 -0.9 0.0
top-down introduced as tool for fiscal consolidation + prevent reoccurrence
10
A Different Motivation (Korea)
Top-down adopted as key part of 4 fiscal reforms (multi-year, top-down, performance, program budgeting)
1) Emphasis on longer-term perspectiveNeed to control anticipated spending growth in social welfare, etc.
2) Efficiencya. Need to focus on broader policy prioritiesb. Eliminate unproductive games in budget negotiationsc. Utilize ministries’ expertise
3) Need to focus on performance management, rather than controlling inputs
11
Top-down & Bottom-up Compared
• Bottom-up • Top-down - Ministry by ministry analysis that - Aggregate fiscal analysis that largely ignores economic forecasts takes into account economic forecasts
- Annual - Multi-year
- Time consuming - Delegated authority
- Ownership of proposals is more - Creates joint ownership of agency- specific proposals
- Reactive - Proactive
12
Complementary Approaches
Approaches to Determining Expenditure CeilingsTop-Down Approach Bottom-Up ApproachOverall Ceiling
Sectoral Ceiling
Overall Ceiling
Sectoral Ceiling
Program Review
Sweden ○ ○ - - △
Netherlands ○ ○ - △ ○
UK ○ ○ - △ ○
Denmark ○ ○ - △ ○
Korea ○ ○ - △ ○
Canada ○ - - ○ ○
Australia ○ - - ○ ○
Chile ○ - - ○ ○○ : actively used, △ : used as reference, - : not used
•Top-down approach should be complemented by bottom-up methods:
- Information for evaluating new initiatives- Program reviews for monitoring programs/activities
1.What is Top-down Budgeting?2. Historical Background
3.Issues in Implementation4. Prerequisites5. Conclusion
Outline
14
Determining Spending Ceilings
Overall Ceiling1) Prudent Economic Assumptions (Growth, etc.)
– Sensitivity analysis– Independent panel or private sector forecasting – Built-in bias toward lower growth forecast
2) 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
15
Determining Spending Ceilings
Sectoral Ceilings• Must not affect overall ceiling• Usually overlap with ministerial boundaries
(good program budget design)
• New initiatives may be required to be funded by savings from existing programs
16
Issues in Setting Ceilings
Operating vs. Capital Ceilings• Ministries tend to favor operating expenses• Denmark: separate ceilings for current &
capital expenses- Sub-ceiling for salaries within operating ceiling
• UK- Current expenses: Golden Rule- Capital expenses: Sustainable Investment Rule
17
Issues in Setting Ceilings
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
18
Issues in Setting Ceilings
Buffers against Contingencies• Built-in buffers in prudent forecasts Windfalls (repay debt, tax cuts, 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
19
Issues in Setting Ceilings
Expenses Included in Ceilings?1) Discretionary expenses usually
included2) Mandatory expenses (social security
entitlements, etc., mandated by law)• Sweden, Korea, Chile, Netherlands:
included• Canada, Denmark: excluded
3) Interest on debt• Sweden, Denmark: excluded• Chile, Netherlands, Korea: included
20
Issues in Setting Ceilings
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
1. What is Top-down Budgeting?2. Historical Background3. Issues in Implementation
4.Prerequisites5. Conclusion
Outline
22
Prerequisites for Success
Good monitoring system to compensate for delegation of authority to ministries
• Performance & program reviews• Information system to monitor execution
Policy capacity + Behavioral change• Budget Office: better forecasts &
projections, need to defend fiscal rules aggressively, but work better together with line ministries
• Ministries: need to learn internal allocation decision-making
23
Prerequisites for Success
Strong PM & Finance Minister• Must be able to enforce ceilings
Commitment to rule-based budgeting• Remove arbitrariness in budgeting
decisions, but leave room for flexibility and judicious discretion/autonomy
Support from the legislature
1. What is Top-down Budgeting?2. Historical Background3. Issues in Implementation4. Prerequisites
5.Conclusion
Outline
25
Conclusion Top-down budgeting is an effective approach to fiscal co
nsolidation• Political will comes foremost; Top-down provides effective frame
work/tools• Framework fits well with multi-year fiscal discipline & rules-based
budgeting• But, discipline tends to slacken as public finances improve
Many countries find it useful to have:• About 30 sub-ceilings for optimal inter-sectoral allocations• Separate ceilings for operating and capital expenditures• Budget margins as buffers against contingencies• Some flexibility in adjusting ceilings for new policy initiatives• Exclusion of mandatory spending differs by country
26
Conclusion
Prerequisites for Success• From the Budget Office
- Willingness to defend fiscal rules aggressively- Good monitoring + evaluation of spending programs- Better analytical capacity & ability to work together with
ministries
• From Line Ministries- Ability to prioritize and make own budgeting decisions
• From PM & Finance Minister- Commitment to rule-based budgeting- Willingness/ability to enforce ceilings
• From the Legislature- Support for rules and ceilings
27
Conclusion
Despite common features & principles, practices differ by country. Some balance needs to be struck between strict discipline and flexibility, especially at initial stage.
Top-down system by itself does not guarantee good results
• Political willingness to honor rules & principles is essential• Capacity of budget office (staff + systems) is also a major
factor• Behavioral change must follow
But, overall, has delivered desired results in countries that have adopted it
End of Presentation