Topdown Budgeting A Tool for Central Resource Management

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Top-down Budgeting A Tool for Central Resource
Management
John M. Kim Korea Inst. of Public
Finance jhrv_at_kipf.re.kr
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Outline

• What is Top-down Budgeting?
• Historical Background
• Issues in Implementation
• Prerequisites
• Conclusion

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Outline

• What is Top-down Budgeting?
• Historical Background
• Issues in Implementation
• Prerequisites
• Conclusion

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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

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Top-down Procedurally Defined

• Budgeting in 2 Steps
• Ceilings (aggregate numbers)
• Decide total spending deficit levels (agg.
  ceiling)
• Inter-sectoral allocation among major policy
  areas (sectoral ceilings about 30)
• Intra-sectoral allocations (details)
• Ministry/agency budgets

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Top-down Functionally Defined

• Division 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

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Benefits of Top-down Budgeting

• Effective for fiscal consolidation
• Easier to integrate with MTEF (MTBF)
• (ceilings are usually multi-year limits)
• Ensures spending is aligned with priorities
• Efficient in time and effort
• Utilizes ministries expertise

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Outline

• What is Top-down Budgeting?
• Historical Background
• Issues in Implementation
• Prerequisites
• Conclusion

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Fiscal Crises as Motivation

• Huge deficits ca.1990 in OECD countries

? top-down introduced as tool for fiscal
consolidation prevent reoccurrence
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A Different Motivation (Korea)

• Top-down adopted as key part of 4 fiscal reforms
• (multi-year, top-down, performance, program
  budgeting)
• Emphasis on longer-term perspective
• Need to control anticipated 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

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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

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Complementary Approaches

• Top-down approach should be complemented by
  bottom-up methods
• Information for evaluating new initiatives
• Program reviews for monitoring
  programs/activities

Approaches to Determining Expenditure Ceilings
? actively used, ? used as reference, -
not used
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Outline

• What is Top-down Budgeting?
• Historical Background
• Issues in Implementation
• Prerequisites
• Conclusion

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Determining Spending Ceilings

• Overall Ceiling
• Prudent Economic Assumptions (Growth, etc.)
• Sensitivity analysis
• Independent panel or private sector forecasting
• Built-in bias toward lower growth forecast
• 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

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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

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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

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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

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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

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Issues in Setting Ceilings

• Expenses Included in 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

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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

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Outline

• What is Top-down Budgeting?
• Historical Background
• Issues in Implementation
• Prerequisites
• Conclusion

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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

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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

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Outline

• What is Top-down Budgeting?
• Historical Background
• Issues in Implementation
• Prerequisites
• Conclusion

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Conclusion

• Top-down budgeting is an effective approach to
  fiscal consolidation
• Political will comes foremost Top-down provides
  effective framework/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

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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

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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

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End of Presentation