Parliamentary Budget Powers: Should Korea Adopt Practices of the United States Congress?

Posted by Ian Lienert

 In early December 2010 I had the privilege of speaking to staff of the world’s second-largest parliamentary budget office in Seoul, Korea. My topic was “Role of the Legislature in Budget Processes—An International Perspective”. Using a 2005 IMF Working Paper, I indicated that the budgetary powers of Korea’s National Assembly are positioned at about the average for OECD countries. I then asked a leading question: Should the Korean National Assembly be given more budgetary power or should there be little change from present institutional arrangements?

Dr. Ilho Yoo, the first discussant, and Member of the National Assembly, argued strongly for more budgetary powers for the legislature, taking into consideration the finding that the United States Congress has very strong budgetary authority. I cautioned against an approach that imitates many of the legislative budgetary practices of the U.S. Other “presidential” countries, such as Brazil, may have better congressional budgetary procedures and therefore be more worthy to examine closely.

Budgetary powers of the Legislature

The legislature’s main way to put its “fingerprint” on the annual budget (law) is by changing estimates of revenues and/or expenditures. The right to make changes in draft budgets varies enormously. In some countries, the legislature imposes huge black smudges on the annual budget; in others, it leaves light fingerprints; and in a few countries, the legislature has no right to reach out its fingers to make an imprint. At the seminar, there was general agreement that one of the most important budgetary powers of the legislature (“Parliament”) is its ability to amend the draft budget proposed by the executive (“Government”). In many countries, parliament’s budget amendment powers are restricted, by Constitution, law, regulation or tradition.

Apart from budget amendments powers, there are other ways that parliaments can affect budget outcomes, including: (1) approving budget policies by adopting substantive and “permanent” legislation (e.g., tax laws; social security laws) and annual spending bills (e.g., an “appropriation act”); (2) approving a medium-term budget framework (MTBF) and/or firm medium-term targets for fiscal aggregates; (3) approving the broad aggregates for the annual budget at the first stage of the budget approval process (this could be several months in advance of the submission to parliament of the detailed annual budget); (4) requiring the government, during budget execution, to seek parliamentary approval for changes in spending, should this be needed (e.g., when revenues are lower than projected in the budget); (5) approving supplementary budgets that increase or decrease the initial budget’s revenues and/or (detailed or total) spending; and 6) approving laws that set up budget oversight arrangements (e.g., laws that establish the external audit office, or a nonpartisan parliamentary budget office, or an independent fiscal council).

These approval powers are enhanced when the legislature (1) is given sufficient time to consider the government’s proposed annual budget; (2) has technical capacity at its disposal, such as a nonpartisan parliamentary budget office or budget specialists that assist parliamentary committees; (3) has a Budget Committee that coordinates and centralizes budgetary recommendations of sectoral parliamentary committees, ensuring that budget policy decisions are made within spending ceilings previously approved by parliament; and (4) has a specialized audit committee and/or staff to follow up on the recommendations of the external auditor’s report on annual budget outcomes.

All of the above aspects can be observed in any country and a scoring system can be developed to measure “budgetary power of the legislature”. In a 2005 IMF working paper, “Who Controls the Budget: The Legislature or the Executive” such an index was constructed.[1] Korea was shown to be ranked in roughly in the middle of the 28 countries in the sample I used. Similar results for Korea were obtained by Professor Wehner of London School of Economics (in chapter 3 of his book on legislative budgeting, which I reviewed on this blog on October 20 – see http://blog-pfm.imf.org/pfmblog/2010/10/legislatures-and-the-budget-process-new-book-published.html ).

Challenges for Enhancing Budgetary Authority of Korea’s National Assembly

In 2003, Korea established the National Assembly Budget Office (NABO)[2] to assist parliament in its budgetary deliberations. NABO is modeled on the United States’ Congressional Budget Office (CBO) and has nearly 120 staff, the second largest non-partisan parliamentary budget office in the world.[3] NABO’s mandate is similar to that of the CBO, notably to provide Korea’s National Assembly with objective, nonpartisan, and timely analyses to support economic and budgetary decisions on the wide array of programs covered by the national budget and fiscal operations. More specific activities include (for more details, see NABO’s website http://korea.nabo.go.kr ):

• Reviewing and analyzing the draft annual budget, final accounts, and public funds management plans.
• Estimating the costs of bills introduced by members of the National Assembly.
• Preparing multiyear economic and macro-fiscal projections
• Evaluating government spending programs or taxation policies.
• Carrying out other studies and analyses in response to requests by the National Assembly Standing Committees and Assembly Members.

Dr. Ilho Yoo, the first discussant, and Member of the National Assembly, expressed a desire for Korea’s National Assembly to be provided with more budgetary powers, with a view to aligning it more closely to those enjoyed by the United States Congress (this issue is discussed further below). Dr. Yoo also noted that, although the Korean Constitution requires the annual budget law to be decided upon by parliament 30 days before the beginning of the new fiscal year, this seldom occurs and there are no penalties for not respecting Article 54 of the Constitution. For example, after a fractious parliamentary debate on December 8, 2010, the National Assembly approved the annual budget law for 2011 (6 days later than the constitutional requirement).

Dr. Inhwa Park, the second discussant, from NABO’s Budget Analysis Counsel, outlined the budget authority and approval procedures of Korea’s National Assembly, the extent of budget adjustments made by the National Assembly, and the challenges for enhancing parliamentary budget authority.  The challenges include:

• Korea’s Constitution restricts the National Assembly’s budget amendment powers. In particular, when the National Assembly wishes to increase any item of expenditure or create new items of expenditure in the draft budget, the National Assembly must first obtain the consent of the Executive.
• The time period for National Assembly’s budget review is limited to 60 days by the Constitution, which states that the government must submit the draft budget to the National Assembly 90 days before the beginning of the new fiscal year. Together with the Constitution’s aforementioned 30 day limit for adopting the budget before the new fiscal year begins, this leaves 60 days for parliamentary discussion of the budget.
•  Submission, by the government, of a medium-term budget strategy prior to the beginning of budget deliberations (e.g., in mid-year). A pre-budget debate by parliament would enable the National Assembly to establish annual and medium-term fiscal aggregates, such as total revenues, total spending, the fiscal balance (deficit or surplus), and public debt.

On the first bullet, the Constitutional constraint on parliamentary budget amendment powers appears to have served Korea well during the past few decades, in that the National Assembly has been forced to be moderate in its proposals for changing the draft budget. Nonetheless, it is understandable that some Members of the National Assembly are seeking greater budgetary freedom and are pressing for more independence of the legislature from the executive in budget matters. However, regarded draft amendments to the annual budget, should the words “the consent of the Executive (government)” be removed from Article 57 of the Constitution, it would be necessary, in my view, to substitute an alternative constraint on the National Assembly’s budget amendment rights. If parliament is provided with too much leeway, fiscal chaos and high inflation could emerge (as it did in France in the 1950s). With unlimited amendment powers, Korea’s National Assembly could derail the government’s plans for medium-term fiscal consolidation (in this context, note that the U.S. Congress has no obligation to establish a binding MTBF). In order to avoid compromising Korea’s excellent record of prudent fiscal management, if there is to be a shift from Executive pre-approval of amendments, it would be useful to require the National Assembly to approve an MTBF and/or annual budget aggregates, and then require the adoption of the annual budget to be within these “top-down” constraints, especially ceilings on aggregate spending. In this context, the procedure in Brazil is briefly discussed below.

Regarding legal constraints on parliament’s budgetary “room to maneuver”, I cited the example of Germany’s new Constitutional budget balance rule and France’s 1958 Constitutional rule (that latter limits budget amendments to reallocations within expenditure programs).[4] An intermediate position would be a rule that allows parliament to increase total expenditures or lower revenues but only under the condition that parliament also introduces offsetting measures that decrease expenditures elsewhere or raise additional revenues so that the net impact on the fiscal balance (deficit) is neutral.

Legislated budget rules failed in the United States during 1985-90. Although the fiscal rules[5] of the Budget Enforcement Act (BEA) 1990 were initially successful in constraining federal deficits, when budget surpluses emerged in the late 1990s, Congress circumvented the PAYGO rule and spending caps, including by abusing the use of “emergency” spending not covered by the BEA’s rules. In the present situation of a huge federal deficit and rapidly-increasing debt, the United States (along with Japan) were the only two OECD countries in late 2010 with large fiscal consolidation needs and no agreed fiscal consolidation plan. Part of this problem, I argued, lies in the fact that the “budget resolution” process in the U.S. Congress does not work well. When such resolutions are adopted (in some years, Congress does not adopt such a resolution), the three-year spending totals approved by the Congressional budget committees provide, at best, indicative ceilings on spending. In the U.S., the outer-year spending ceilings are regularly ignored, as Congress has been unable to focus seriously on the trajectory of fiscal aggregates beyond the upcoming fiscal year. The budgetary time horizon of politicians in the United States appears to be particularly short, in part linked to the two-year election cycle for the House of Representatives. In contrast (and as an example), the United Kingdom’s Fiscal Responsibility Act, adopted in February 2010, obliged all future British governments to adopt a medium-term fiscal consolidation strategy, which is to be quantified (in secondary legislation) for key variables such as the net borrowing requirement and public net debt.[6]

Regarding the time period for parliament’s budget review, the submission of a draft budget to the National Assembly 90 days before the beginning of the new fiscal year provides many parliaments around the world with adequate time to consider the draft budget, make budgetary decisions, and adopt the annual budget as a law before the beginning of the fiscal year. For this aspect, the United States is very much an outlier. This is because the United States President must submit his draft annual budget eight months before the beginning of the fiscal year. This provides Congress with an huge amount of time to consider and amend the budget proposal. Such a long time period gives the many interest groups on “Capitol Hill” plenty of time to influence the Appropriations and other Congressional Committees, sometimes with monetary incentives for supporting the “right” spending measures. Yet despite the very long time period (8 months) for considering the annual budget, Congress seldom enacts the Appropriations Bills before the beginning of the new fiscal year. And if Congress fails to prolong budget spending authority for the new fiscal year (through a process known as “continuing resolutions”), the federal government can be “shut down.” Other countries have Constitutional or other legal constraints that require government spending for essential services to continue (i.e., the government administration is never “shut down”), in the event that parliament does not adopt the annual appropriations bill(s) before the beginning of the new fiscal year (in Korea, the Constitution has such a provision).

The budget approval process in the United States does not require a strategy for the much-needed medium-term fiscal consolidation. This is partly because the federal budget itself is quite fragmented. Typically, twelve separate annual Appropriations Bills are approved each year. And the spending from the annual Appropriation Acts covers only about one third of total federal spending. The remaining two thirds is covered by “permanent” legislation, mostly for “mandatory” expenditure, which is not reviewed annually by Congress in the same depth as “discretionary” expenditure.

A more fundamental shortcoming here is the absence of an agreement in the U.S. Congress on the need to legislate a binding MTBF – a law that would require Congress to act to reduce “big ticket” items of federal government spending. In this context, in early 2010 Congress was unable to agree to adopt a law establishing a bipartisan National Commission on Fiscal Responsibility and Reform; a key requirement of such a commission would have been to make recommendations for reducing large federal deficits and burgeoning federal debt in future years. Although such a Commission was established by (presidential) Executive Order, and 11 of the 18 commission’s members agreed in October 2010 on a number of sensible suggestions for reducing the federal deficit over the medium-term (including by reducing “mandatory” expenditures such as Medicare, Medicaid and social security), in the absence of a requirement for Congress to adopt a binding quantified strategy for reducing the federal deficit and debt over the next 5-10 years, such far-reaching policy reforms will, at best, serve as a background for yet-to-be-decided budget deficit-reducing Congressional decisions.

There is also a need for greater budget transparency in the United States, in particular to end the practice of “earmarking”, whereby Senators or Congress-people add their favorite spending projects to Appropriations Bills at the last moment, for constituency reasons, and without adequate regard to the efficiency of the spending. Although this problem is not as large as the need for Congress and the Executive to agree on a binding path for fiscal aggregates that would reduce the federal deficit over the medium-term, it is oft-discussed and there have been various ill-fated attempts to end the practice, with little success.[7]

In summary, it is my view that some legislatures, notably the U.S. Congress, can be provided with too much budgetary power. For fiscal consolidation to occur quickly, reduced congressional budgetary powers would be highly desirable in such countries.

My final observation on the first bullet above is that the requirement for Korea’s legislature to seek agreement with the executive on amendments to the draft budget does not prevent the National Assembly from changing the annual budgets. For example, in her presentation, Dr. Park provided evidence for the significant number of changes that the National Assembly typically makes in the draft budget. For example, in the 2010 budget law, 13 percent of the budget spending items were changed; in terms of amounts (the absolute value of increases or decreases), the changes resulted in a 2.7% change for general/special accounts and a 5.5% change for public funds.

On the second bullet above, I noted that the “90 day submission requirement” is in line with the OECD average for the submission of draft budgets to Parliament. This is entirely appropriate, in my view. If it were possible to shorten easily the “30 day adoption-before-the-fiscal-year requirement”, the National Assembly would gain up to one month more to consider the draft budget. However, since this is a Constitutional requirement, a change would be very difficult in Korea.[8] At any rate, a 60 day limit on the parliamentary budget examination period is sufficient, in my view. Without a deadline for the budget discussions in different committees, politicians will inevitably get sidetracked away from budget-specific issues and on to more sensitive political issues that may be a cause of friction between the ruling and opposition parties (or, in the case of coalition governments, of the parties in parliament that constitute the coalition).

For bullet three above, a two-stage budget approval procedure is an excellent suggestion. A mid-year pre-budget debate in parliament would enable the National Assembly to establish annual and medium-term fiscal aggregates. In the case of Brazil[9], in July of each year, Congress adopts a “Budget Directives Law”, which includes a binding fiscal balance target (usually a primary surplus), and other indicative aggregates (in an annex) for the annual budget: total revenues, total spending, and public debt. In other words, Brazil’s Congress debates, early in the year, the government’s proposed medium-term budget framework (MTBF).[10] Later in the year (four months before the beginning of the fiscal year), Brazil’s Congress receives the detailed budget. Although Congress can propose amendments, the net impact of any amendments must stay within the budget parameters that Congress adopted 4-5 months earlier.

In my view, rather than only following budgetary procedures of the United States, Korea could learn of other country’s systems, which may prove to provide a better model. For example, a close examination of Brazil’s Congressional budget procedures and Fiscal Responsibility Act 2000 could be very helpful. Brazil’s Fiscal Responsibility Act includes a requirement for the government to prepare a Fiscal Risk Statement to accompany the draft budget directives law; such a provision could be most useful in Korea, where the risks related to debt and debt guarantees of autonomous or non-central government entities need to be fully understood. Also, Brazil’s CBO has a competent technical team that provides valuable oversight of the Executive’s tendency to present conservative revenue projections. Analysis by Brazil’s CBO allows Congress to challenge the government on its macro-fiscal assumptions and suggest changes in budget parameters. In Brazil, this can result in a more realistic budget and a lesser number of supplementary budget amendments during the year.

In summary, the seminar allowed a lot of NABO staff to hear of international experiences in parliamentary budget processes. Participants were able to pose questions relating to the challenges facing the National Assembly’s institutional arrangements for receiving, debating, and approving the annual budget law and other budget-related laws.