Planning and Budgeting in Social Welfare

John M. KimCenter for Fiscal AnalysisKorea Institute of Public

Finance

John Kim / KIPF 2

Outline

Overview of Korean welfare budgetNature of welfare spending Welfare planning as forecastingPlanning vs. budgeting

John Kim / KIPF 3

1. Overview of Korean Welfare Budget

Growth of Welfare Budget (tr. won, %)

1997 1998 2001 2002 2003Welfare Budget 22.1 29.0 36.2 39.6 42.8

GDP Ratio 4.87 6.45 6.65 6.65 6.70

Welfare Growth

31.35 14.0 9.18 8.09

GDP Growth -0.83 9.81 9.13 7.38

John Kim / KIPF 4

1. Overview of Korean Welfare Budget

Composition of Welfare Budget (% of GDP)

1997

1998

2001

2002

2003

Public Pensions 1.58 2.45 1.87 1.87 1.92Health Insurance 1.72 1.95 2.59 2.49 2.50

Unemploymt. & Indust. Accidents 0.56 0.97 0.69 0.79 0.75

Assistance to Needy 1.01 1.08 1.50 1.50 1.53

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1. Overview of Korean Welfare Budget

Factors Underlying Welfare Spending Growth

1. Population aging Public pensions Health-care spending

2. Deteriorating income distribution Transfers & training for disadvantaged

Korea faces “rich-country” problems, but without the “riches” to cope yet

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2. Nature of Welfare Spending

Technology Development & Economic Growth

Infectious

High

Extended

Informal

Chronic

Low

Nuclear

Formal

Diseases

Birth & Death Rates

Population Age Structure

Family Type

Support Networks

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2. Nature of Welfare Spending

Technology Development & Economic Growth

Public Health Sanitation Hospitals MedicineNutrition

Short-term Planning & implementation

Social Insurances Pensions Health Care UnemploymentSocial Assistance

Long-term Forecasting

Welfare Programs

Welfare Budgeting

Kore

Kore

aa

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3. Welfare Planning as Forecasting

Threats to Stable Fiscal Management: Social & political pressures in late 1990s forced very

large and unforeseen jumps in welfare spending To restore stability to fiscal management:

Better forecasting of welfare needs & costs (MTEF) Avoid large sudden shifts in intersectoral resource allocatio

n by anticipating welfare requirementsTop-down approach to budgeting

Enforce spending envelope and improve predictability Delegate details of social welfare management

John Kim / KIPF 9

3. Welfare Planning as Forecasting

Welfare Spending Projections

0

2

4

6

8

10

12

2000 2010 2020 2030Year

% of GDP

PensionsHealth InsuranceUmemp & Accidents InsuranceLow-income Groups & Disadvantaged

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3. Welfare Planning as Forecasting

Dual nature of long-term forecasts Projections: Best guess, ensuring needs are met (MTEF) Spending ceilings/targets: Allocation decisions (Top-down)

Welfare Sub-sector

Sub-projections Involved in Forecasting

Policy Decisions

Pensions Population by age & sex

Economic growth

Retirement, etc.

Pension scheme (contributions & benefits)

Health Care

Incidence & cost of illnessLTC

Coverage

Assistance to Needy

Income distribution by HH sizeHousehold composition (size, age structure)

Extent and level of assistance

John Kim / KIPF 11

4. Planning vs. Budgeting

Different Pressures on Welfare BudgetingLong-term pressures driven mainly by

pensions and health care (may approach 20% of GDP by 2030) Immediate pressure from low-income

and disadvantaged groups for more social assistance

John Kim / KIPF 12

4. Planning vs. Budgeting

Reconciling Long-term Projections and Annual BudgetsOld approach: Line-item, bottom-up,

incremental budgeting (full control)New approach: Top-down,

incremental budgeting (partial control)Different from full autonomy: Top-down,

program-oriented budgeting with autonomy within spending envelopes (programs)

John Kim / KIPF 13

Final Remarks

Need to improve capacity for long-term policy analysis (at least several decades) Hampered by lack of both analytical

techniques and extensive, detailed statistical data on socioeconomic and biomedical factors

Referring to other countries’ experiences may be second-best alternative Korea’s welfare spending in 2030 will be

roughly equivalent to OECD average circa 2000.

Caution: population aging and welfare growth can be quicker than in “forerunner” countries

John Kim / KIPF 14

Supplement: Population Aging in Korea

John Kim / KIPF 15

Supplement: Gini Index for Korea

0.230

0.240

0.250

0.260

0.270

0.280

0.290

0.300

0.310

0.320

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Gini Index (Urban Households)