IV. KOREA

1.2. Reforms of budget system laws

Until the late 1990s, there had been no substantial reforms of the major budget system laws that were adopted in the 1960s.3 Since budgetary performance over several decades had been sound, it was perceived that there was less need to reform budget system laws compared with other OECD member countries. Even after passing through the Asian crisis that began in 1997, gross public debt was only around 22% of GDP in 2001, well below the average of 74% in the OECD area (OECD, 2003).4 Under these circumstances Korea has maintained an annual budgeting system with an input-orientation, strong control over budget execution by the central budget authority, and lack of formal fiscal rules for controlling public expenditures.

The way the budget system operates came to the fore during the 1997 financial crisis, which required a radical change in fiscal policy from the previous conservative fiscal management.5 In particular, the government started to issue public bonds to stimulate the economy, which increased public debt. There was also recognition of the upward potential pressures on public expenditure over the medium term, including those caused by the financial sector restructuring programme (mostly financed by governmentguaranteed bonds); an expansion of spending on pensions, health care, and unemployment benefits; and the uncertain cost of co-operation with North Korea (OECD, 2003). Finally, over the years, there had been a steady increase in the number of public funds, which complicated overall fiscal management, especially due to the fact that public funds and the national budget were not reviewed together (MPB, 2002).

To meet these challenges, the government initiated some reforms in budget system laws (MPB, 2004a). First, for the purpose of enhancing transparency and the surveillance of the National Assembly over the public funds, the FAFM was substantially amended in 2001 and 2003. All public funds are now subject to approval by the National Assembly. Before the amendment, public funds had not been subject to supervision and approval by the National Assembly, even though they are financed by levies or transfers from the budget. These amendments have reduced fragmentation in the operation of the national budget.

Second, the Basic Law on Managing Statutory Expenses was enacted in 2002 to enhance transparency in the collection and implementation of quasi taxes.6 In order to prevent ministries from creating new quasi taxes and to strengthen the transparency of the quasi taxes, the act requires ministries to obtain prior approval from the MPB before creating a new quasi tax and to report how these revenues will be collected and used to the National Assembly annually. The act provided the National Assembly with stronger control over public financial management.