HOW TO INTEGRATE PLANNING AND

BUDGETING?

Focusing on Korean experience

December 2015,

Jaehyuk Choi, Policy Analyst

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

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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

• 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

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

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

• 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 discipline If, 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

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

Poverty Reduction Strategy Plans have been used

more than 40 low-income countries

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But, in practice,,,

Not many countries have been successful in

economic development

9

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?”

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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

• Korea’s Economic Planning Board (EPB) held the authority to design the 5-year Economic Development Plans and was also empowered with budgetary authority

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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

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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

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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($)

• 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

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S. Korean case: Overall view of success

Organization

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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

• 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

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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

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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

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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

• 5 year expenditure plan

• Annually updated

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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

THANK YOU !

JAEHYUK.CHOI@OECD.ORG

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