MTEF in the Welfare Sector

Heesuk Yun

June 2005

2

Overview

During the 1970s and 1980s, little attention had been paid to welfare policies.

– The focus was on “growth” rather than “equity.”

But after the financial crisis of 1997, equity issues came to the fore with the rising unemployment and the increasing number of the working poor.

Consensus on the need to expand the social safety net and to strengthen social cohesion has grown.

The welfare expenditure increased 18.3% a year during 1990-2001, rising from 4.3% of GDP in 1990 to 8.7% in 2001.

– As a percentage of total spending, it grew from 10.5% in 1995 to 16.4% in 2003.

3

Social Expenditure Composition (2001)

TotalOld age

Survi-vors

Incapa-city

Health Family ALPUnemploy-

mentOthers

KOREA(A)

  8.70 1.22 0.20 0.60 3.24 0.16 0.30 2.51 0.47

OECD Average

(B)22.54 8.06 0.99 2.72 6.18 2.00 0.72 1.02 0.51

A/B   0.39 0.15 0.20 0.22 0.52 0.08 0.42 2.47 0.93

(% of GDP)

4

Projected Changes in Welfare Expenditure

in the National Fiscal Management Plan (2004-2008)

1.3

5.2 2.3 2.1 3.9 10.7 2.8 24.0

3.8 1.2 3.2 6.6 14.02.32004

2008

Basiclivelihoodguarantee

Childcare/support for the

workers

Publichealth

Health insurance

Labor market policy

Public pension

Veterans

5

Sharp Contrast in Perspectives

Concerns over the speed of spending growth

– Increasing pressure for cost containment

– Rising demand for greater efficiency and effectiveness

– Growing importance of ex ante planning and ex post evaluation

Discontent with the current level of spending

– Inadequacy of the benefits provided by the current social insurance and public assistance programs

– Blind spots in these programs (those who deserve but are not covered by them)

Underlying is the uniqueness of welfare programs, namely their

irreversibility.

6

Major Policy Issues in Korea

Eliminating blind spots in the Basic Livelihood Guarantee System and providing sufficient support to the beneficiaries.

Strengthening the support for the vulnerable groups such as the elderly and the handicapped.

Increasing the support for early childhood education and care.

Promoting harmonious labor-management relations and supporting job creation programs.

Expanding healthcare services, especially in the areas of cancer prevention and anti-smoking programs, and building a public healthcare infrastructure.

7

Changing National Priorities

Focus in the NFMP 2004-2008 was on...

Strengthening the economic growth potential and improving the living conditions of low-income and vulnerable groups.

– Expanding early childhood education and care to promote women’s participation in economic activities

– Reducing the youth unemployment and supporting the job creation in the public and private sectors

8

Preparing for the aged society

– Building a long-term-care (LTC) infrastructure and introducing a LTC insurance

Japan

France

Germany

Italy

U.S

Korea

1970

1864

1932

1927

1942

2000

1994

1979

1972

1988

2014

2018

2006

2019

2010

2008

2030

2026

24

115

40

61

72

18

12

40

38

20

16

8

7% 14% 20% 7%14% 14%20%

Share of the Old (65 and above) Number of Years

This year, new issues have emerged...

9

Reconsidering the current tax-based government support to the self-employed enrolled in the National Health Insurance.

– Securing the accountability of the insurer (the National Health Insurance Corporation).

-5

0

5

10

15

20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

Insurance premium

Tax-based government subsidies

Surplus(+)/Deficit(-1)

(Trillion won)

10

Monitoring the performance of various relief programs for low-income groups.

– Basic Livelihood Guarantee System

– Job creation programs

– Old-age income supplement

– Public works

11

Budget Process for the NFMP 2004-2009

Jan. – Apr.

– Fiscal year starts on Jan. 1.

– By the end of January, line ministries submit to the MPB their spending needs for the next 5 years (including the current year, the budget year, and 3 out-years).

– Sectoral task forces discuss major policy issues and present their recommendations in public hearings.

– The MPB prepares a draft National Fiscal Management Plan (NFMP) through discussions with line ministries.

• The draft NFMP contains major policy directions and fiscal aggregates (total spending, deficits, debts, etc.) for the next 5 years and sectoral spending projections.

12

Cabinet meeting

– At the end of April, a cabinet meeting, chaired by the president, is held in a secluded place to discuss and finalize the ceilings.

– Following the cabinet meeting, the ceilings are transmitted to line ministries in the Guide to Budget Preparation.

May – Jun.

– Line ministries prepare their budget requests and send them to the MPB.

Jul. – Aug.

– The MPB prepares the draft budget.

• Less emphasis on the microscopic control of line items and more on the strategic alignment of budget requests with overall policy directions.

13

Sep.

– The draft budget is discussed between the ruling party and the MPB (on behalf of the president).

Oct.

– The draft budget is approved by the cabinet and then presented to the National Assembly by Oct. 2.

Dec.

– The National Assembly approves the budget.

14

Old Habits Still Persist...

MPB

– Micro intervention in individual projects/programs

– Strong prior to cut the budget

MOFW (Ministry of Health and Welfare)

– Lack of medium-term strategic perspectives

– Lack of effort to present the evidence of program effectiveness

15

But Significant Changes Are Taking Place...

Increased mutual understanding on

– The overall resource constraint and the importance of maintaining fiscal sustainability

Increased awareness on both sides on

– The need to persuade each other with objective evidence on program effectiveness

– The need for performance management of individual programs to gain the evidence

16

Still, Improvements Are Required...

in the Norms and Practices

Strengthening performance management in line ministries

– Introducing performance monitoring and expanding program evaluation

– Developing reliable and internationally comparable statistics to make it possible to assess the cost-effectiveness of spending programs

Enhancing the capacity for planning and prioritizing

– Long-term strategic plans, annual business plans, and annual performance reports to be published by line ministries

– The planning and budget bureau of individual line ministries to play a greater role in the coordination of ministerial policies and budget requests

17

Changing the role of the MPB

– A central coordinator of government policies

– Less control on inputs and more on outputs and outcomes

Improving the cooperation between the MPB and line ministries

– The MPB as a consultant for line ministries to enhance program performance

– Building mutual trust in a collective action game

18

And also,

in the Framework and System

Clarifying the medium-term targets

– Presently, it is not clear which variable the government is targeting in the medium term; the budget balance, the total spending, or the debt-to-GDP ratio.

– An ideal target would be “a balanced budget over the business cycle,” given the low level of debt-to-GDP ratio in Korea.

– In this scenario, a lower-than-expected growth will produce deficits and a higher-than-expected growth surpluses, with deficits and surpluses averaging out over the cycle.

– And the debt-to-GDP ratio will decline slowly over the years.

19

Setting out the annual operational targets

– There are two types of operational targets commonly employed -- budget balance and total spending.

– Total spending is a superior choice because

• it is less influenced by the cyclical position of the economy and therefore easier to target; and

• it assists in a counter-cyclical management of fiscal policy by leaving the balance to fluctuate over the cycle.

– Presently, the Korean government intends to keep the annual spending totals unchanged in successive NFMPs, and thus appears to have the total spending as annual targets.

20

Introducing “risk analysis” that addresses such issues as

– Deviation of medium-term growth rates and other macroeconomic variables from the projected levels

– Contingent liabilities of the government

– Population aging

Setting up a mechanism for “baseline” projections

– The MPB to provide line ministries with standard assumptions on key macro-variables such as wage and price inflation

– Line ministries to project their spending on “existing programs” and then to add the costs for new policy initiatives and to subtract “savings options”

– The MPB to check the validity of ministerial projections and to aggregate them to arrive at the total government spending

21

Introducing “program budgeting”

– The Korean government is currently redesigning the structure of its budget accounts around functions, administrations, and programs.

– The resulting program structure will make it easier to allocate resources according to the national priorities and set ceilings on sectoral spending.

– “Programs” will also act as the basic units of performance management in the future.