Korea, Republic of Top-Down Budgeting: Advisory Committees in the Budget Preparation and Evaluation

Branch of Government:
Executive

Open Budget Survey 2015 / Public Participation in the Budget Process - Country Score: 83

Stage in Fiscal Policy Cycle

Formulation

Summary

The Top-Down Budgeting System was adopted to encourage innovations in budget allocation at each ministry within sectoral ceilings. This reform was part of the “Three plus One” reforms that were introduced simultaneously in 2004 and received legal support from the National Fiscal Act of 2006. The “Three plus One” reform consisted of the National Fiscal Management Plan and the Performance Management System, along with the Top-Down Budgeting System and the Digital Budget and Accounting System.[ref]

Under the Top-Down Budgeting System, total spending is set first, followed by an expenditure ceiling for each sector and ministry for the strategic allocation of fiscal resources. Fiscal resources are then allocated by each government department or ministry to each project below the ceiling. In addition, the system is also complemented by a mandatory self-assessment by each line ministry and meta-evaluation of certain programs every three years by the Ministry of Strategy and Finance.[ref] Public participation is achieved through the use of an advisory committee that is involved at every stage of the Top-Down Budgeting System, both at the departmental level and the level of the central budget agency. The advisory committee consists of both CSO staff and outside experts.[ref]

The mechanism illustrates the principles of openness, transparency and complementarity in practice.

Basic Facts

Top-Down Budgeting is led by the executive branch of government in the budget formulation stage.

Why

Prior to the adoption of the Top-Down budgeting system, the Ministry of Strategy and Finance was fully authorized to allocate funds in public spending.[ref] Each line ministry requested budget allocation by project and the Ministry of Strategy and Finance budgeted by examining every single project since all projects requested by the line ministries were pre-screened by the Ministry of Strategy and Finance and the budgetary line items were determined by the Ministry too.[ref] The Ministry of Strategy and Finance had overriding power over the line ministries, which – as observers note – led to perverse incentives on the line ministries’ end, who requested more projects, often without justification and with an inflated budget, in anticipation of cuts from the Ministry of Strategy and Finance. This overburdened the Ministry of Strategy of Finance and also led to a lack of evaluations and performance review of the line ministries.[ref]

Authorizing Environment

The Top-Down Budgeting System was introduced as part of the Three plus One reforms in 2004, which also comprised the National Fiscal Management Plan and the Performance Management System, as well as the Digital Budget and Accounting System. The reforms gained further legal support from the National Fiscal Act of 2006.

Who and How

As a result of the Top-Down Budgeting System, the budget process was divided into two stages.[ref] During the first stage, the Ministry of Strategy and Finance sets the ceilings by sector. During the second stage, line ministries allocate the budget for programs in accordance within the ceilings set by the Ministry of Strategy and Finance[ref]. Non-compliance with the ceiling results in penalty from the central budget agency.[ref] There is an advisory committee set up for consultation that is involved in each stage of the process. Members of the committee include both outside experts and CSO staff.[ref]

The new system also includes the previously missing performance evaluation system, which has been key in reducing the waste and misuse associated with the old, often over-complicated budget system. In the old system, auditing focused solely on the estimated and implemented amount of projects, but there was no performance monitoring and evaluation enforced.[ref] Under this new performance evaluation system, programs and projects above a certain spending threshold are reviewed every three years through a self-assessment system carried out by the line ministries themselves.[ref] Each evaluation is confirmed and reviewed by the central budget agency, which also published evaluation guidelines ahead of time[ref] The self-evaluation process was designed after the Program Assessment Rating Tool (PART) of the U.S. federal government.[ref]

The self-assessment can be followed up with an in-depth review and meta-evaluation in case wasteful spending is found.[ref] This kind of in-depth review is normally done by the Korean Development Institute (KDI), not the central budget agency.[ref] The results of the in-depth review can be reflected in next year’s budget. Each year, approximately 500 projects are reviewed.[ref] There are 15 common questions and an additional few questions per program type.[ref] About 10 programs per year are selected for meta-evaluation by the Ministry of Strategy and Finance, with a focus on cross-cutting programs.[ref] In 2005, 555 programs were assessed, of which 87 (over 15%) were classified as “not effective”, and their funding was cut by 10 percent.[ref] In 2006, the first year of meta-evaluation, 9 programs were selected for meta-evaluation[ref]

The process during both stages is open to experts and CSOs. During the self-evaluation or assessment stage, each line ministry has to organize a committee for the self-evaluation of projects. The committee usually consists of 20 members that include CSO staff, academics, and outside experts.[ref] Members are given sufficient information to be able to evaluate the given line ministry’s performance and they can provide both oral and written suggestions. In addition, they can vet or veto certain budget proposal and also have the power to audit a certain ministry.[ref]

At the level of the Ministry of Strategy and Finance, there is also an Advisory Committee for Fiscal Policy, as required by Article 10 of the National Fiscal Act.[ref]

The committee has around 30 members, including vice ministers, governors, experts, academics, CSO staff, and local government officials.[ref] This Advisory Committee must sign off on the budget and also on the National Fiscal Management Plan.[ref] Members of the Committee receive sufficient information to make informed comments – they are free to provide comments in writing or in person and they can vet or veto proposals as well as audit the entire executive budget.[ref] The Advisory Committee can advise on matters related to the National Fiscal Management Plan, proposal of budget and management of special funds for the fiscal year, guidelines for the budget proposal, establishment, merger or abolishment of special accounts and funds, and the evaluation of the management of special funds.

During the Roh government (2003-2008), each ministry organized its own Advisory committee for the Budget, which reviewed the budget proposal of the line ministry before it was submitted to the Ministry of Strategy and Finance. This process was eliminated with the next government in 2008.[ref]

In addition to the advisory committees, the public at large is also able to follow the entire process online. In addition, while the line ministries are preparing their budget requests, the central budget agency collects a nationwide perspective through online idea contests and open discussions on the budget, and also visits local governments.[ref] The ideas collected during this process can end up in the National Fiscal Management Plan.

Results and Impact

Members of the committee have direct influence over budgetary projects through participating in both the self-assessment and the meta-evaluation, and the power of vet and veto provides significant power to the committee, both at the line ministries’ and the central budget agency’s level.

As a result of the new budgeting process, line ministries’ budget requests declined dramatically.[ref]

Lessons Learned

The committees – both at the line ministries’ and the Ministry of Strategy and Finance’s level – have a considerable role in the decision-making and self-evaluation process. They are also provided with sufficient information to exercise their right to provide comments, vet or veto.

Principles of Public Participation in Fiscal Policy

The principles best illustrated by the mechanism are:

Openness: The process is mostly open, since the committees are provided with sufficient information in order to make impactful decisions. In addition, the process can be followed through the relevant ministry’s website by the public.

Transparency: The process is transparent in the sense that relevant fiscal information is readily available to the committee members in order to help them make an informed decision.

Complementarity: The process complements the existing budget-setting and self-assessment system at the line ministries’ and the central budget agency’s level.

Aligned to principle

Complementarity:
The mechanism complements existing governance and accountability systems by allowing direct input to strengthen the representative role of Parliament.
Depth:
The process is only partially transparent. The result of the consultation process is published and the public has a means to check how their views are incorporated. However, the process could be made more transparent if all relevant information was made available ahead of the discussions, in order to support public engagement, highlighting and informing key policy choices and trade-offs, and identifying potential social, economic and environmental impacts.

Country Context

South Korea –officially known as the Republic of Korea– was established on the southern portion of the Korean Peninsula in 1948. The division between South and North Korea (Democratic People’s Republic of Korea) was followed by the Korean War (1950-1953). The country has a presidential system, where the president is directly elected by popular vote for a single five-year term. The National Assembly is unicameral, with 300 members elected for four year terms. Taking turns at power are two major parties, the conservative Saenuri Party and the liberal Democratic Party.[ref]

South Korea began to transition to democracy in 1987 following a slate of military rulers. Local autonomy was reintroduced in 1995. Another watershed even was the financial crisis in 1997 that instigated a slate of reforms aimed at increasing fiscal transparency. These three events – democratic transition, local autonomy, and the financial crisis – provided momentum for the development of fiscal democracy in the country.[ref] Transparency has been promoted in waves, first by the first civilian president, Kim Young-sam (1993-1997), who launched a reform agenda including the implementation of a real-name financial transaction system and the enactment of the Freedom of Information Act.[ref] During the presidency of Kim Dae-Jung (1998-2002), the introduction of preliminary feasibility tests subjected major government projects to strict cost-benefit analysis, aiming to decrease budget waste. Durign Roh Moo-hyun’s presidency (2003-2007), various public participation mechanisms were introduced for the budget process, such as the establishment of the National Assembly Budget Office and the Audit and Inspection Research Institute, which provided avenues for public participation during legislative review and audit. In 2004, the “Three plus One” reform was introduced, which included the National Fiscal Management Plan, Top-Down Budgeting, Performance Management System and the Digital Budget and Accounting System, all launched simultaneously. The National Fiscal Act of 2006 provided further legislative support for these initiatives establishing their legal foundations.

As the GIFT case study notes, “Korea has a vibrant and active civil society including many public interest groups, think tanks, and organized labor, as well as business interests, who actively participate in the policy-making process.”[ref] According to the 2015 Freedom in the World Report by Freedom House, human rights groups, social welfare organizations and other NGOs are active and operate freely.[ref]

Open Budget Survey 2015

According to Open Budget Survey 2015, South Korea has is one of the frontrunner in the Open Budget Survey 2015 published by IBP. It scored 65 out of 100 in the Open Budget Index. The score for Public Participation in the budget process is 83 out of 100, where as the score for budget oversight by legislature and supreme audit institutions are 73 and 50 respectively. [ref]