Fiscal Transparency in Korea

1
Fiscal Transparencyin Korea
Joonook Choi
Korea Institute of Public Finance
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0. Background

• Realizing the Importance of transparency
• in the economic system during the 1990s

• Lack of transparency as causes of several
  problems
• Preparing for Accession to OECD (1996)
• Financial Crisis (1997)

Realizing the importance of fiscal transparency

• ltExternallygt
• IMF code of good practices on fiscal transparency
  (1998)
• OECD best practices for Budget Transparency(2001)

• ltInternallygt
• Corruption
• Inefficiency
• etc.

3
Less emphasis on the issue of F/T At
least compared to Turkey (?) Special Ad hoc
Committee on Fiscal Transparency and Public
Finance in the context of 8th Five year
development plan in Turkey

• Mentioned as one of the principles
• But not chosen as a major agenda for (fiscal
  )reform
• No extensive research on the issue in Korea
• - only some research projects KIPF(2004)

• Major agendas for recent fiscal reform
• MTEF
• Transition to top-down approach
• Performance-oriented budgeting

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Why less emphasis on F/T in Korea?

• Fiscal Reform is less important in Korea?
• - less emphasis on needs for fiscal reform
  since financial crisis in Korea was not caused
  by problems in the fiscal management
• Korea has a high level of fiscal transparency?
• F/T is not a very attractive reform agenda?
• - because the idea itself is vague?
• because the outcome of reform may be less visible
  
• than outcome of other changes in the fiscal
  system

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Outline of the presentation

• Problems in F/T in Korea
• Assessment by IMF in 2001
• Rethinking the importance of F/T
• Efforts to increase F/T in Korea
• Focusing on the achievement since 1998
• Remaining Issues and Discussion

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I. Problems in F/T in Korea

• Fiscal outcome in Korea looks very goods during
  the 1980s and early 1990s
• - very sound fiscal balance
• - low public debt
• But there were hidden problems
• roles of fiscal policy and financial policy
• Inefficiency

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Assessment of fiscal transparency practices by
IMF - In relation to the requirements of the
IMF Code of Good Practices on Fiscal
Transparency January 23, 2001
Korea meets international best practices in
fiscal transparency in many areas. .. Despite
these achievements, Korea falls short in some key
areas of fiscal transparency. ..
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• The staffs commentary (summary)

• The government should take the opportunity to
  reassess and more clearly define its fiscal role
• Steps to affirm the universality of the budget as
  the principal instrument of fiscal policy and to
  improve the scope and coverage of budget
  documents
• Significantly rationalizing the use of
  extrabudgetary funds and special accounts will be
  important in this regard.
• Improve the reporting of fiscal information
  including information on public sector financial
  assets and liabilities, and the underlying
  methods and assumptions in forecasting.
• Simplifying the tax system and improving taxpayer
  services.

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• Reassess and more clearly define its fiscal role
  by

• reducing public sector direct involvement in the
  corporate and financial sectors, cutting the
  subsidy component of the activities of the credit
  guarantee funds and allowing the corporate and
  financial sectors to be run purely on a
  commercial basis.
• clearly distinguishing the BOK's monetary policy
  activities from the activities of the fiscal
  authorities.
• conducting all intra-government lending on
  market-based terms.
• reducing the current extensive recourse to
  lending from the budget at subsidized rate and
  the offering of loan guarantees for commercial
  purposes

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• Affirm the universality of the budget

• significantly rationalizing the use of
  extrabudgetary funds and special accounts and
  integrating all fiscal activities into the state
  budget so that they are subject to the same
  scrutiny and prioritization of expenditures as
  other state budget entities.
• moving away from frequent recourse to
  supplementary budgets as a tool of fiscal policy.
• as part of the reduction in the use of
  extrabudgetary funds, the government should also
  move to eliminate the extensive use of
  earmarking, which complicates budgetary
  management and reduces budget accountability and
  transparency.

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• Improvements in the annual budget documents

• the budget should include a more specific
  statement on objectives and should be cast in a
  form that facilitates ex post evaluation against
  measurable budget outcomes (rather than an
  evaluation based solely on financial compliance).
  
• the budget documents should provide information
  that consolidates the general account of the
  central government with extrabudgetary funds and
  special accounts, i.e., consolidated central
  government fiscal accounts
• existing expenditure commitments should be
  clearly distinguished from new policies in the
  annual budget.

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• the medium-term economic framework should be
  enhanced with a more detailed projection of
  macroeconomic and fiscal aggregates, an explicit
  forecast of budgetary aggregates in the absence
  of policy action, and a description of policy
  actions that will need to be taken to achieve the
  government's medium term fiscal objectives
• the government should provide within the budget,
  and to the public, a statement and, insofar as is
  possible, a quantification of their quasi-fiscal
  activities.
• the budget should report information on the
  structural or cyclically adjusted balances and
  consider, over the medium-term, providing
  information in budget documents on accrual-based
  and generational accounts.

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• the budget should contain a comprehensive
  identification and quantification of the major
  fiscal risks.
• the budget should contain a report on government
  contingent liabilities as well as on potential
  future obligations the budget will be required to
  meet, such as the actuarial imbalances in the
  occupational pension schemes.
• the government's ex post reconciliation between
  actual fiscal performance and the budget plan
  should highlight any changes to be made to budget
  forecasting methodology as a result of the
  analysis of past outturns

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• Improvements in the annual budget documents

• improve the quality of information on local
  governments and reduce delays in the availability
  of data.
• attempt to regularly publish consolidated
  information on its financial assets in order that
  the public can assess the net indebtedness of the
  public sector.
• while information on government macroeconomic and
  fiscal projections are available to the public,
  working methods and assumptions underlying the
  fiscal forecasts should also be made available
  and should include a statement making it clear
  who has produced the forecasts.

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• Taxation system

• significantly simplifying the tax system through
  the elimination of a number of taxes, reduction
  in the amount of earmarking, and a
  rationalization of tax reliefs, preferences,
  exemptions, and privileges
• the government should continue to expand on its
  initiatives to improve taxpayer services which
  include providing tax forms and information on
  the tax service's website, expanding access to
  electronic filing and allowing for electronic
  payment of taxes, and providing greater
  counseling to taxpayers by telephone, over the
  internet, and in tax offices.

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II. Rethinking the importance of F/T

• Financial crisis and Fiscal policy
• The scope of fiscal transparency
• - OECD Best practices tend to focus on providing
  information
• - IMF code on good practices on fiscal
  transparency
• includes clarity of roles and
  responsibilities
• Role of the government sector was not clearly set
  
• - government used the financial policy
• as a alternative to fiscal policy
• ? problems in the financial sector gt
  financial crisis

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• Core of fiscal transparency is revealing
  information,
• but final goal is attaining better fiscal
  outcome
• Intermediate goal can be
• control the government
• control of the interest groups
• The set of information or the structure of
  providing information can be different in each
  country
• in spite of some universal characteristics
• the areas in which F/T can be effective can
  differ in each country and priorities can also be
  different

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• (2) All fundamental fiscal reform agendas
• are related to fiscal transparency
• MTET without improving fiscal transparency may
  result in the increase in the fiscal expenditure
• Top-down approach without improving fiscal
  transparency may result in low efficiency in
  fiscal expenditure
• Performance management is not possible without
  improving fiscal expenditure

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• (3) Changes in the economic/social/fiscal
  situation is making the F/T more important
• Changes in the social structure
• interest groups, NGOs (Participatory government)
• Changes in the (economic and) fiscal situation
• Increase in the needs for fiscal resources in
  some sectors
• Efficiency in government expenditure is more
  important
• Providing Justification for allocation of fiscal
  resources
• Using F/T as a tool for balancing power among
  interest groups

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III. Achievements in Improving F/T

• There have been various efforts to improve F/T
• even though it was not chosen as a major reform
  agenda
• Redefining the role of fiscal policy
• As part of fiscal reform
• As part of the public sector reform
• Mandatory revelation of management information
  for quasi government units
• Using IT (E-government) and providing information
  

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• But progress was uneven and slow in some areas
• Some progress in the process of fiscal management
  
• Progress was slow
• - When interest groups are involved
• - When political compromises are necessary
• Substantial progress in providing information
• but there are criticism that
• Whether providing information has any
  significant effects on the fiscal management
• The quality of provided information is not high
  enough
• (e.g. consolidated budget)

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(1) Special Accounts and State Funds

• Assessment in 2001 proliferation of
  extrabudgetary funds have obfuscated the limits
  of government activities.
• The consolidated central government is made up of
  
• - 1 general account,
• - 5 public enterprise special accounts,
• - 18 other special accounts,
• - 43 extrabudgetary funds.
• In addition, 18 funds, some of whose activities
  are of a fiscal nature, are excluded from the
  coverage of the consolidated central government
  and general government statistics.

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• Reducing the number of special accounts and state
  funds has been a classical issues in fiscal
  reform in Korea
• - continuous efforts, but no significant
  achievement
• Current plan to reduce the number from 76 to 61
• (government proposal announced in May, 20, 2005)
• - Scope rather than the number is more important
• More important change is the management system of
  extrabudgetary funds such as in 2003
• The control of budgeting authority and the
  National Assembly over state funds strengthened

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(2) Using IT in the Fiscal Management

• Much interest in e-government since 2000
• NAFIS
• Budget Execution (payment), Settlement,
  Management of National Assets etc.
• Fully in use since 2003, still in the process of
  upgrading
• Directorate of Treasury in MOFE (Ministry of
  Finance and Economy)
• FIMSYS Budget Formulation
• MPB (Ministry of Planning and Budget)
• Two separate systems, Integration of or linking
  the two systems (problems due to government
  organization)

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(3) Scope of the Budget

• Consolidated budget in Korea is not comprehensive
  enough,
• it does not include
• the budget of local governments
• ? Technical problems in the accounting standards
• Some public enterprises
• National Health Insurance
• ? Conceptual debate in the scope of the
  consolidated budget
• Very slow progress in
• Redefining the scope of the consolidated budget
• Providing statistics with international standard

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(4) Tax system

• Significant Improvement in the tax
  administration
• - Fundamental changes in the organization of tax
  administration (National Tax Service) in 1999
• - A decrease in the corruption in the tax
  administration
• - But there are criticism that tax
  administration is affected by political
  environment
• But the changes in the tax system is slow
• - still many earmarked taxes
• - widespread tax reliefs
• in the agricultural sector
• in providing assistance to SMEs

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Evaluating the progress in the past years

• Not chosen as a major reform agenda
• - less attractive as an agenda for fiscal reform
  
• - but related with many major issues in fiscal
  reform
• Getting more important in the new environment
• But there have been efforts in various respects
  
• Progress has been slow in some areas

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Points of Further Discussion

• F/T and other changes in the fiscal system
• F/T and role of NGO or the press
• - utilization of information
• F/T and Interest groups
• Can F/T be used as a tool to control interest
  groups?
• F/T and political stability
• - Under what political situation can improving FT
  be effective in enhancing the fiscal outcome?