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How to integrate planning and budgeting? Jaehyuk Choi, OECD Secretariat


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Presentation by Jaehyuk Choi, OECD Secretariat, 11th OECD-Asian Senior Budget Officials Annual Meeting, Bangkok, Thailand, 17-18 December 2015.

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How to integrate planning and budgeting? Jaehyuk Choi, OECD Secretariat

  1. 1. HOW TO INTEGRATE PLANNING AND BUDGETING? Focusing on Korean experience December 2015, Jaehyuk Choi, Policy Analyst
  2. 2. I. The relationship between Planning and Budgeting I. Approaches to integrate Planning and Budgeting II. Korea’s experience focusing on Strategic Planning III. Conclusion Content
  3. 3. 3 Why we are talking about planning and budgeting? Planning •Reality •Look Present •Short-term •Tackle Present needs •Political based •Great Vision •Look Future •Long-term •Reflect Social needs •Rationality Budgeting Planning and Budgeting are key tools that governments can use for economic development But, planning and budgeting has different characteristics
  4. 4. • Often unrealistic about resources (Fiscal burden) • Usually ignored when budget is made • Lack adequate means of implementation 4 Either planning or budgeting alone is not sufficient for allocating resources Planning Budgeting • Budgeting is incremental (differ only marginally) • Focus on short term issues • Driven by fiscal pressures not by social needs
  5. 5. Linkage between planning and budgeting Opportunities vs Costs Structured by sectors vs spending units Different timeframe 5 Why is it difficult to integrate planning and budgeting? Different Organization Different perspectives and values Change oriented vs Continuity oriented
  6. 6. 6 Budgeting is basic component. Is planning essential thing to make? THE ANSWER WOULD BE YES. WHY? • Do we know what we should be doing? If No, Good opportunity to build consensus on national goal • Valuable to consider social needs unconstrained by the budget • Preparing for long term issues • Though, planning cannot be achieved fully, capacity can be enhanced
  7. 7. • Inadequate focus on the future and planning process could be waste of time and energy 7 What will be the appropriate relationship between planning and budgeting? (In theory) If, Budgeting dominates • Weaken fiscal disciplineIf, Planning dominates THUS, PLANNING AND BUDGETING SHOULD CO-EXIST • A rational planning supported by budgeting is ideal • Having separate but linked process gives the government the advantages of planning and budgeting • Making planning more budget-friendly (e.g. introducing a budget constraint into the planning process)
  8. 8. 8 Two Major Approaches to integrate planning and budgeting Strategic Planning (National planning) •Government plans program initiatives within a budget constraint that encourages ministries to reallocate resources to national priorities •Governments assess their strengths and weaknesses and demands on them to develop a change oriented strategy Medium-Term Expenditure Framework (MTEF) •Extend the timeframe of budgeting from one to 3-4 years •A baseline projects the future costs of existing and proposed programs •MTEF is a rolling process •Every entity should reexamine and devise its missions to focus on fundamental purposes •Resources should be shifted within the entity •Planning is for fixed number of years
  9. 9.  Poverty Reduction Strategy Plans have been used more than 40 low-income countries 9 But, in practice,,, Not many countries have been successful in economic development 9
  10. 10. 10 How can it be done in practice? S.Korean case can be an exemplar. S.Korea in 1950s: 60$/capita (Low income country) • UN Korea Reconstruction Agency representative: “Will it be possible Rose flowering in the trash?”
  11. 11. 11 How can it be done in practice? S. Korean case can be an exemplar. Strategic Planning (1962-1992) •5-year Economic Development Plan •Economic Development Plan was grand framework or benchmark of annual budgeting •Economic Planning Board was in charge of planning and budgeting Transitional Period (1993-2003) •No long-term planning •Utilizing line ministries’ specialty and enhancing budgetary autonomy MTEF (2004-) •5-year fiscal plan •Top-down budgeting •Performance management system •Digital budgeting and accounting system KOREA UNDERWENT THREE PHASES OF FISCAL PLANNING
  12. 12. • Korea’s Economic Planning Board (EPB) held the authority to design the 5-year Economic Development Plans and was also empowered with budgetary authority 12 S.Korean case: Organizational perspective President Ministry of Finance (Tax, Treasury, Finance) Prime Minister Other ministries Economic Planning Board Deputy Prime Minister (planning, budgeting, cooperation) 5-year Economic Development Plans (1962-1991) 1962-1994 • As a Deputy Prime Minister agency, EPB can coordinate and determine matters relating economic development plans through various coordinating bodies • The objective of the EPB was to deliberate and execute investment priorities for economic development by addressing challenges of few resources and inefficient investment
  13. 13. 13 S.Korean case: Strategic Planning History 1st 5-year EDP (1962-1966) •Pursuit for growth •Grow rural incomes through greater productivity •Grow exports to improve trade balance •Foster technology by establishing R&D institute 2nd-3rd 5-year EDP (1967-1976) •Building exports oriented heavy and chemical industries •Accelerate rural income growth •Accelerate export growth •Invest in SOC (express way, plant complex) 4th–5th 5-year EDP (1977-1986) •Pursuit for growth, equity, and stability •Social development (income distribution, living condition) •High technology industries (semi-conductors) 6th 5-year EDP (1987-1991) •Pursue market based economy and redefine government function •globalization •Information technology industry
  14. 14. 14 How can it be done in practice? S. Korean case can be an exemplar. 1961: 82$/capita 1992: 7,527$ 1962-1979 (initial stage) - average economic growth: 9.1% - Average export growth: 38% Export products: Agricultural products Industrial products Light industrial products Heavy products Wigs Textiles Autos Semi-conducts 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 60 65 70 75 80 85 90 95 GDP per capita($)
  15. 15. • How to design an organizational structure (planning and budgeting) matters • Especially, developing and emerging economies could put importance on planning • It would be plausible to have an organization to look at economy from an overall economic perspective • Resource allocation should be decided by the priority based on the public interest • Talented people have to be employed and should be incentivised to work hard 15 S. Korean case: Overall view of success Organization
  16. 16. 16 S. Korean case: Overall view of success • Carefully thought out plan tailored to each country considering history, culture and natural environments can have a meaning • Clear policy goal (e.g. growth) should be established • The 5-year plans has been changed appropriately by the times Factor driven growth stage (cheap labour) investment driven (manufacturing capability) innovation driven (innovative capability) • Planning could be flexible reflecting changing circumstances (e.g. Kyungbu expressway) Planning
  17. 17. • However planning is good, it’s meaningless without implementation • Leadership that can induce sustained efforts can make a big difference • Back up with strong support from the top (President or Prime Minister) is critical • Well designed incentive and monitoring system can make a big difference in the final results 17 S. Korean case: Overall view of success Implementation
  18. 18. 18 Korean case: limitations of strategic planning HOWEVER, LIMITATIONS OF STRATEGIC PLANNING SHOULD ALSO BE WELL NOTICED • Low income countries: Planning seems more important • High income countries: Budgeting seems more important 0% 20% 40% 60% 80% 100% Low income Middle income High income Planning Budgeting
  19. 19. 19 Korean case: limitations of strategic planning • Strategic planning can be more successful in small and developing economies. Why?  As economy evolves, economic, social structure are complex and specialized that the effectiveness of single comprehensive planning will be lowered  The demand for ministerial autonomy increased Strategic Planning (1962-1992) Transitional Period (1993-2003) MTEF (2004-) • Korea moved from strategic planning to MTEF
  20. 20. 20 Korean case: limitations of strategic planning President Ministry of Strategy and Finance (Budgeting, Economic Policy, Tax, Treasury) Other ministries Prime Minister Financial Services Commission • Korea integrated Economic Planning Board and Ministry of Finance in 1994 and has a different organizational feature now President Ministry of Finance (Tax, Treasury, Finance) Prime Minister Other ministries Economic Planning Board Deputy Prime Minister (planning, budgeting, cooperation) 1962-1994 2008-present
  21. 21. • 5 year expenditure plan • Annually updated 21 S.Korean case: MTEF after 2004 MTEF • Total Expenditure / Sectoral ceiling • Enhanced line ministries autonomy Top-down budgeting Performance evaluation • Program Review: Self-Assessment • In-depth Evaluation • Performance Monitoring Digital Information System • Integrated fiscal information system • Connect to local government