Top-down Budgeting

A Tool for Central Resource

Management
John M. Kim
Korea Inst. of Public
Finance
jhrv@kipf.re.kr

Outline
1. What is Top-down Budgeting?
2. Historical Background
3. Issues in Implementation
4. Prerequisites
5. Conclusion

Outline
1.What is Top-down
Budgeting?
2.
3.
4.
5.

Historical Background
Issues in Implementation
Prerequisites
Conclusion

Top-down vs. Bottom-up

Top-down
Bottom-up
Problems of Bottom-up Budgeting
Difficult to control aggregate spending
Sectoral allocations may not be optimal
Hard to keep multi-year perspective
Inefficient formulation process
- Game-playing between budget office and
line ministries
- Ministries expertise under-utilized
4

Top-down: Procedurally
Defined

Budgeting in 2 Steps
Ceilings (aggregate numbers)
1) Decide total spending & deficit levels (agg.
ceiling)
2) Inter-sectoral allocation among major policy
areas (sectoral ceilings: about 30)

Intra-sectoral allocations (details)

1) Ministry/agency budgets

Top-down: Functionally
Defined

Division of Roles/Responsibilities
Ceilings (aggregate numbers)
1) Final decision by PM & Finance Minister
2) Focus on

Aggregate fiscal management

Medium-term perspective (multi-year ceilings)
Policy priorities

Intra-sectoral allocations (details)

1) Ministries formulate their own budgets
2) But must follow rules
6

Benefits of Top-down
Budgeting
Effective for fiscal consolidation
Easier to integrate with MTEF (MTBF)
(ceilings are usually multi-year limits)

Ensures spending is aligned with

priorities
Efficient in time and effort
Utilizes ministries expertise
7

Outline
1. What is Top-down Budgeting?

2.Historical Background
3. Issues in Implementation
4. Prerequisites
5. Conclusion

Fiscal Crises as Motivation

Huge deficits ca.1990 in OECD countries

199
1

199
2

199
3

199
4

199
5

199 199 199 199 200

6
7
8
9
0

Fiscal Balance (% of GDP)

Australia

-3.8

-6.0

-5.6

-4.6

-3.7

-2.2

-0.5

0.6

1.6

0.1

Canada

-8.3

-9.1

-8.7

-6.7

-5.3

-2.8

0.2

0.5

1.6

3.2

1.4

2.1

1.8

1.6

2.4

2.1

1.8

0.4

-1.4

0.1

-2.4

-2.2

-2.9

-2.4

-2.3

-1.0

0.4

1.1

3.2

2.5

1.8

1.4

2.5

3.1

4.2

3.8

3.6

1.9

3.1

6.9

-3.2

-4.4

-3.6

-4.2

-4.2

-1.8

-1.1

-0.8

0.4

2.2

1
1
.
4

1
0
.
8

1.3

3.7

Chile
Denmark
Korea
Nether
lands

top-down
introduced
as tool
Sweden
-2.0
-7.8
-7.7 for
-3.1 fiscal
-1.6
2.1
consolidation + prevent reoccurrence
UK
OECD

-3.1

-6.4

-7.9

-6.7

-5.8

-4.4

-2.2

0.4

1.1

1.6

-3.7

-4.6

-5.0

-4.2

-3.9

-3.2

-1.8

-1.4

-0.9

0.0

A Different Motivation
(Korea)

Top-down adopted as key part of 4 fiscal reforms

(multi-year, top-down, performance, program budgeting)
1) Emphasis on longer-term perspective
Need to control anticipated spending growth in social welfare, etc.

2) Efficiency
a. Need to focus on broader policy priorities
b. Eliminate unproductive games in budget negotiations
c. Utilize ministries expertise

3) Need to focus on performance management, rather

than controlling inputs

10

Top-down & Bottom-up

Compared
Bottom-up

Top-down

- Ministry by ministry analysis that

- Aggregate fiscal analysis
that
largely ignores economic forecasts takes into account
economic
forecasts
- Annual

- Multi-year

- Time consuming

- Delegated authority

- Ownership of proposals is more

agency- specific

- Creates joint ownership of

proposals

- Reactive

- Proactive
11

Complementary
Approaches
Top-down approach should be complemented by bottom-up
methods:
- Information for evaluating new initiatives
- Program
reviews for
monitoring Expenditure
programs/activities
Approaches
to Determining
Ceilings
Top-Down Approach

Bottom-Up Approach

Overall
Ceiling

Sectoral
Ceiling

Overall
Ceiling

Sectoral
Ceiling

Program
Review

Sweden

Netherlands

UK

Denmark

Korea

Canada

Australia

Chile

: actively used, : used as reference, - : not

used

12

Outline
1. What is Top-down Budgeting?
2. Historical Background

3. Issues in Implementation
4. Prerequisites
5. Conclusion

Determining Spending
Ceilings

Overall Ceiling
1) Prudent Economic Assumptions (Growth, etc.)

Sensitivity analysis
Independent panel or private sector forecasting
Built-in bias toward lower growth forecast

2) Fiscal Rules for Good Discipline

Sweden: structural surplus of 2% GDP

Chile: Structural surplus of 1% GDP
UK: Balance current budget over econ. cycle
Surplus automatically goes to repaying debt

14

Determining Spending
Ceilings

Sectoral Ceilings
Must not affect overall ceiling
Usually overlap with ministerial
boundaries
(good program budget design)

New initiatives may be required to be

funded by savings from existing
programs
15

Issues in Setting Ceilings

Operating vs. Capital Ceilings

Ministries tend to favor operating expenses
Denmark: separate ceilings for current &
capital expenses
-

Sub-ceiling for salaries within operating ceiling

UK
-

Current expenses: Golden Rule

Capital expenses: Sustainable Investment Rule

16

Issues in Setting Ceilings

Number of Ceilings

Korea (200+) vs. Sweden (27)

Optimal number is around 30
-

More ceilings make budgeting decisions politically

difficult
Need to give ministries room to exercise autonomy
to ensure their proactive participation

This means Budget Office needs better tools:

-

Performance management
Information system to monitor execution
Enhanced analytical capacity for policy assessment
17

Issues in Setting Ceilings

Buffers against Contingencies

Built-in buffers in prudent forecasts
Windfalls (repay debt, tax cuts, etc.)
Budget Margin
-

Overall Ceiling = Sect. Ceilings + Budget

Margin
Covers unexpected changes (forecasts
errors, etc.) and institutional reforms after
ceilings were fixed
Usually does not cover new policy initiatives
18

Issues in Setting Ceilings

Expenses Included in Ceilings?

1) Discretionary expenses usually included
2) Mandatory expenses (social security
entitlements, etc., mandated by law)
Sweden, Korea, Chile, Netherlands: included
Canada, Denmark: excluded

3) Interest on debt
Sweden, Denmark: excluded
Chile, Netherlands, Korea: included
19

Issues in Setting Ceilings

Funding for New Policy Initiatives

Sweden: must come from existing
ceilings
Most countries have review process to
judge new initiatives adjust ceilings
-

Australia, Canada: Cabinet committees

Netherlands, Denmark: simply verify fit
with coalition agreement
Chile: pooled Bidding Fund from savings
on obsolete or poorly performing programs
20

Outline
1. What is Top-down Budgeting?
2. Historical Background
3. Issues in Implementation

4.Prerequisites
5. Conclusion

Prerequisites for Success

Good monitoring system to compensate

for delegation of authority to ministries
Performance & program reviews
Information system to monitor execution

Policy capacity + Behavioral change

Budget Office: better forecasts & projections,
need to defend fiscal rules aggressively, but
work better together with line ministries
Ministries: need to learn internal allocation
decision-making
22

Prerequisites for Success

Strong PM & Finance Minister

Must be able to enforce ceilings

Commitment to rule-based budgeting

Remove arbitrariness in budgeting
decisions, but leave room for flexibility
and judicious discretion/autonomy

Support from the legislature

23

Outline
1. What is Top-down Budgeting?
2. Historical Background
3. Issues in Implementation
4. Prerequisites

5.Conclusion

Conclusion
Top-down budgeting is an effective approach to
fiscal consolidation

Political will comes foremost; Top-down provides effective

framework/tools
Framework fits well with multi-year fiscal discipline &
rules-based budgeting
But, discipline tends to slacken as public finances improve

Many countries find it useful to have:

About 30 sub-ceilings for optimal inter-sectoral allocations

Separate ceilings for operating and capital expenditures
Budget margins as buffers against contingencies
Some flexibility in adjusting ceilings for new policy
initiatives
Exclusion of mandatory spending differs by country
25

Conclusion
Prerequisites for Success

From the Budget Office

-

From Line Ministries

-

Ability to prioritize and make own budgeting decisions

From PM & Finance Minister

-

Willingness to defend fiscal rules aggressively

Good monitoring + evaluation of spending programs
Better analytical capacity & ability to work together with
ministries

Commitment to rule-based budgeting

Willingness/ability to enforce ceilings

From the Legislature

-

Support for rules and ceilings

26

Conclusion
Despite common features & principles, practices differ
by country. Some balance needs to be struck between
strict discipline and flexibility, especially at initial stage.
Top-down system by itself does not guarantee good
results

Political willingness to honor rules & principles is essential

Capacity of budget office (staff + systems) is also a major factor
Behavioral change must follow

But, overall, has delivered desired results in countries

that have adopted it

27

End of Presentation