Participatory Gov. Completes
Fiscal Reform

The National Fiscal Act goes into effect next year to finish innovation and reform in the fiscal sector

Chang Byoung-wan, minister of planning and budget, said the fiscal sector has become one of a few representative areas in which the participatory government has completed innovative and reform roadmaps.
"The belated enactment of the National Fiscal Act seems like our changing junior high school students"clothes into collegians'according to our physical growth,"MPB Minister Chang said in a recent interview with NewsWorld.
"The enactment of the National Fiscal Act is designed to back up a shift in national fiscal management from a focus on control and input in the annual perspective to the one into autonomy and performance in the mid- and long-term perspective, and lay a legal foundation for the implementation of the participatory government's four key fiscal reform schemes ― the National Fiscal Management Plan, Top-down Budgeting, Performance Management System and Digital Budget and Accounting System,"he said.
Minister Chang categorically denied allegations that the Vision 2030 was politically motivated by the administration of President Roh Moo-hyun, who is nearing his presidential term. He noted, "The Vision 2030 is Korea's first long-term comprehensive plan designed to tackle the pending issues (low birth rate and declining potential growth rate) and make preparations for our post-retirement life and the future of our children."The following are the excerpts of his interview.
Question: Will you explain to our readers about the National Fiscal Act that goes into effect next year?
Answer: The current Budget and Accounting Act underwent revisions on 25 occasions since its enactment in 1961, causing some, but not many changes. However, the size of the general account of the government budget surged from 45.9 billion won in 1961 to 147 trillion won, representing a 3,200-fold jump in 45 years. The National Fiscal Act has been enacted to overhaul the Budget and Accounting Act in 45 years. The belated enactment of the National Fiscal Act seems like our changing junior high school students'clothes into collegians'according to our physical growth.
The enactment of the National Fiscal Act is designed to back up a shift in national fiscal management from a focus on control and input from an annual perspective to one of autonomy and performance in the mid- and long-term perspective, and lay a legal foundation for the implementation of the participatory government's four key fiscal reform schemes ―the National Fiscal Management Plan, Top-down Budgeting, Performance Management System and Digital Budget and Accounting System.
As part of efforts to ensure fiscal soundness and transparency, the government is required to submit a national debt management plan to the parliament. The general public can be allowed to request each minister to correct any illegal fiscal spending.
Q: Will you elaborate on the Vision 2030, the government's long-term plan?
A: Korea faces a rapid decline in birth rate and an unprecedented pace of aging of the Korean population. Korea's birth rate stood at 1.08 in 2005, quite lower than 2.04 in the United States, 1.74 in UK, 1.37 in Germany during the same year, and 1.29 in Japan in 2004. The nation's rate of production mainstream age groups (between 29 and 49) to the elderly is forecast to plummet five in 2005 to 0.7 in 2050. Human resources development is needed for continuous growth, and medical, housing and welfare demands need to be satisfied for sound labor reproduction.
Many countries in the world are coming to terms with rapid changes brought on by internalization and informatization, but Korea's economic growth stays stagnant due to slowness in coping with them. Korea witnessed potential growth rate declining from 8.3 percent in the '70s to 7.7 percent in the '0s, 6.3 percent in the '0s and 5.2 percent in the 2000s.
Overseas relocation of labor-intensive production facilities and automated systems have weakened job creation for growth. The nation's employment rate rose from 60.6 percent in 1989 to 61.8 percent in 1993 and 63.7 in 1997, but the rate showed signs of weakening with 63.3 percent in 2002 and 63.7 percent in 2005.
The Vision 2030 is Korea's first long-term comprehensive plan designed to tackle these pending issues and make preparations for our post-retirement life and the future of our children.
The master plan calls for, among others, raising Korea's per capita GDP in 2030 to the current level of OECD advanced countries as well as its welfare to the average OECD level. The nation's current per capita GDP ranked 24th among OECD countries with $16,000, but the ratio of public and social expenditure to GDP stood at 8.6 percent in 2005, one-third of the level of advanced countries. To this end, the government will focus on the implementation of four strategies, including growth engines expansion, while reforming social systems that stand in the way toward economic growth and supporting essential sectors with preemptive investments.
The Vision 2030 is designed to make the most of the functions of the market and private sector, departing from the past governments'growth-oriented strategy, and focus on meeting social safety net and people's basic demands, which cannot be managed by market forces.
Q: Will you tell our readers the size of the 2007 budget proposal and its major features?
A: The government's 2007 budget proposal shows that the nation's 2007 total expenditures of the national budget and funds is scaled at 238.5 trillion won, representing a 6.4 percent rise over the 2006 budget, which is lower than 6.7 percent of the estimated 2007 nominal economic growth rate.
The 2007 budget proposal highlights the expansion of futuristic growth engines, satisfaction of people's basic needs and national safety net buildup. The proposal calls for strategic allocation of national resources in the mid- and long-term perspective for the future. The 2007 proposal on budget and funds is based on the Vision 2030 and the National Fiscal Management Plan between 2006 and 2010.
The 2007 budget proposal reflects the government's effort to improve fiscal management efficiency. The government took a dramatic step designed to restructure the fiscal sector by scaling down projects found to yield insufficient results and consolidating similar and overlapped projects. The size of voluntary readjustments increased from 2.4 trillion won in 2005 to 4.2 trillion won in 2006 and an estimated 4.6 trillion won in 2007. Build-Transfer-Lease (BTL) projects will be fully carried out to capitalize on the private sector's creativity and efficiency. The value of BTL projects will likely soar from 8.3 trillion won on a public notice basis in 2006 to the 9.9 trillion won level in 2007.
Q: National debt has been rising in recent years. What's the current status of Korea's fiscal soundness and future prospects?
A: National debt has surged recently, but they are lower in consideration of international comparisons in terms of the size and also remain sound in its quality. Korea's debt amounts rose to 284 trillion won in 2006, accounting for 33.4 percent of GDP to rank sixth among OCED countries. The figure is compared to 172.1 percent in Japan, 64.1 percent in the United States, 47.2 percent in UK and 77.7 percent in the average OECD country in 2005. It is noteworthy that people's burden for repayments accounted for 120 trillion won or as low as 42 percent of the national debt aggregate. In particular, out of 150 trillion won, which was added to the national debts during the period between 2003 and 2006, only 24 trillion won or 15 percent of the increase was related to fiscal projects.
The ratio of national debt to GDP is forecast to decline after reaching the peak in 2007. The National Fiscal Management Plan between 2006 and 2010 predicts that the ratio of national debts to GDP will rise from 33.4 percent in 2006 to 33.4 percent in 2007, but the figure will drop to 32.9 percent in 2008, 32.3 percent in 2009 and 31.3 percent in 2010. The newly enacted National Fiscal Act stipulates the establishment of a national debt management plan in order to ensure systematic management of debts.
Q: What steps are in store to reform systems like the National Pension and the National Health Insurance?
A: The government plans to increase expenditures on welfare in a bid to meet people's basic demands, while at the same time restructuring such systems as the National Pension and the National Health Insurance that are feared to pose financial woes in the future. The ratio of the elderly aged 65 or above to population with production ability (aged between 15 and 64) is projected grow from 11.1 percent in 2002 to 21.7 percent in 2020. It means the increase in number of people supporting one old person from 9 in 2002 to 46 in 2020.
The National Pension will be changed in the way benefits are lowered and insurance premiums are raised in order to ensure equality among generations and brace for the aging of the population. The government is seeking to reduce the income substitution rate from current 60 percent to 50 percent in 2008 and raise the insurance premium rate from current 9 percent to 12.9 percent in 2017. Advanced countries such as Germany and Japan have taken steps like a reduction in the benefit rate and readjustment of the beneficiary age to stabilize the finances of the fund.
In an effort to improve equality in the insurance costs among office and district insurance subscribers, the government has changed its subsidizing method ― shouldering 20 percent of premium income instead of subsidizing 50 percent of medical reimbursements of district health insurance subscribers. The government is seeking to introduce a positive list system on insured pharmaceuticals on a gradual basis to cut down on expenditures on pharmaceutical payments.
Q: Will you give the details of policies designed to ensure management innovation of public organizations and their institutional system reform?
A: Public organizations not only take up a big share in the national economy, but also are closely related to public lives. A total of 314 public organizations, including Korea Highway Corp., have a combined manpower of 240,000. Their aggregate budget amounts account for 29 percent of GDP or an equivalent to a 1.1-fold of the 2005 government budget. For example, Korea Highway Corp., Korea Railway Corp. and KEPCO offer such essential public services as transportation and energy to the general public.
The government will support the establishment of autonomous and responsible management system. It strives to remove or overhaul unnecessary prior restrictions or interference in public organizations. Therefore, the government will submit to the parliament its assessment of annual business performances of major government-invested organizations, and depending on this, reappointment or removal of their head and differentiated incentives will be decided.
The government makes efforts to dramatically improve management transparency of public organizations. Last December, it opened a portal site designed to help the general public search and compare such management information as financial conditions of public organizations. Personnel costs per employee will be added to the list of assessment to determine whether their management goes loose.
It is seeking to enact a law designed to provide systematic support to public organizations, which would reclassify the scope of public organizations according to OECD standards and redesign inside and outside surveillance and auditing systems.
Q: Will you introduce the Digital Budget and Accounting System that goes into operation next January?
A: The upcoming Digital Budget and Accounting System refers to an integrated fiscal information system that simultaneously deals with all fiscal duties ― budget formulation, execution, accounting and assessment. The system covers all fiscal information on the central and local governments as well as public organizations. It is designed to digitalize information on the past budget and accounting so that it can be reproduced and edited at ease. The system will be put into test-operation starting November 6th after the system buildup project that was launched in 2004 is finished.
If and when the Digital Budget and Accounting System is implemented in a full-fledged manner, government officials will be able to handle all fiscal duties on-line and fast through the system, while people will receive the latest fiscal information through a home page. In particular, the system is expected to enhance transparency and responsibility in the process of fiscal decision-making and public participation in the process of national fiscal management by managing national fiscal projects on real time and sharing the information with the general public. nw

Chang Byoung-wan, minister of planning and budget

MPB Minister Chang Byoung-wan holds an interview with NewsWorld President-Publisher Elizabeth M. Oh.