IV. KOREA

Box 2. Korea: Major provisions of the National Budget

Bill 2004

●The Bill would repeal the BAA and the FAFM.

●The government would be required to submit to the National Assembly a medium-term fiscal plan (including targets for a consolidated budget balance and public debt) and a national debt management plan.

●A “top-down” budget system would replace the present detailed incremental budgeting.

●Supplementary budgets would be restricted to emergency situations.

●Any bills generating higher public spending or lower revenue would require a plan on how to finance the costs. Consultation with either the MPB or the Ministry of Finance and the Economy (MOFE) would be required before the National Assembly debate.

Third, during 2004, a “Big Bang” reform of the budget system laws was under discussion both at State Council (see section 3.2.1 below) level and in the National Assembly. The MPB proposed the National Budget Bill in July 2004 (MPB, 2004b). The draft new law, which aims to strengthen the fiscal sustainability, transparency and performance of the national budget, if passed, would be far-reaching. The proposed comprehensive budget reforms, shown in Box 2, would help control fiscal risk and facilitate effective allocation of resources in a medium-term framework (Park, 2004). The draft new law is a follow up to the Fiscal Responsibility Bill that was submitted to the National Assembly in 2001, but was not passed due to the lack of political consensus.7

Irrespective of whether the proposed National Budget Bill is adopted, in 2004 the State Council decided to introduce a “top-down” budget system, under which spending ministries are provided with firm ceilings for budget preparation (MPB, 2004c; MPB, 2004d).8 Based on these, spending ministries prepare their budget request by the end of May, the legal deadline for submitting budget requests. Although not in a law (at the time of writing this study), this change will be a turning point in the public expenditure management system, since it seeks to set up a strategic framework for budget decision making which, through a top-down approach, is likely to eventually alter managerial behaviour and organisational culture in the government.

2. Principles underlying budget system laws

The legal framework for the budget includes the principles of annuality, universality, balance, accountability, and specificity. However, the modern

IV. KOREA

principles of transparency, stability and performance have not been sufficiently embodied into budget system law.

The principle of statutory authorisation by the National Assembly is included in the 1948 Constitution (Arts. 54, 58 and 59) and other laws. New taxation (including quasi taxes) or changes in existing levels of taxation should be authorised by the National Assembly before the executive levies or spends it. The principle of accountability is also embodied in the Constitution and the BAIA. The BAI, as the supreme audit institution, audits the annual accounts of government and submits its audit report to the President of the Republic and the National Assembly.

The Constitution, complemented by the BAA, specifies the principle of an annual budget. The fiscal year begins on 1st January and ends on 31 December (BAA, Art. 2). The executive is required to prepare the draft budget for the fiscal year (Constitution, Art. 54). The budget estimates are for a 12-month period. The budget document contains data for the fiscal year, and appropriations, in principle, are required to be implemented within the fiscal year (see exceptional circumstances in section 4 below).

The principle of unity, which requires all revenues and expenditures to be included in the same budget document, is not well respected. The budget documents for general account, special accounts, and the public funds are separately submitted to the National Assembly. However, the total revenues and expenditures approved by the National Assembly cover all central government financial activities (the principle of universality). The principle of specificity is included in the BAA. Budget appropriations are for a specific purpose (Art. 20). Budgets for each department are drawn up according to detailed economic and functional classifications.

The BAA also specifies the principle of balance. The law requires an accounting balance between budget expenditures and budget revenues and financing (Arts. 3 and 18). Annual expenditure should be financed by revenue other than bonds or borrowings (Art. 5). The BAA permits the issuance of public bonds or borrowing only in unavoidable circumstances, and subject to the prior approval of the National Assembly (principle of stability).

Various commentators have pointed to the lack of transparency in the budget system (for example, see IMF, 2001; OECD, 2003). Transparency has been hampered by the highly fragmented and compartmentalised budget structure – general account, special accounts and public funds. The budget document does not contain a statement of the major fiscal risks, nor is the performance principle respected. In an effort to enhance performance in public finance management, some pilot projects were launched in 1999. Under this system, 26 participating agencies prepared and submitted performance plans to