Splitting the "Government Within the Government" MOEF... Where Will the Hands to Implement Expansionary Fiscal Policy Go? [New Administration Policy Issues]

The core of the ministry restructuring being discussed under the Lee Jaemyung administration, which has declared an expansionary fiscal policy, lies in separating the budgetary functions of the Ministry of Economy and Finance (MOEF). The plan is to decentralize the MOEF's powerful authority, which has allowed it to act as a "government within the government" by overseeing the allocation of more than 670 trillion won in annual government budgets, and to strengthen the president's authority over budget formulation as the head of the executive branch. However, there are concerns that neutralizing bureaucratic checks could allow budget planning to be swayed by political objectives and create loopholes in national fiscal management.

Yonhap News Agency

The Era of Super-Ministries Is Over... Separation of Budget and Policy Functions

The argument for splitting the MOEF stems from the perception that too many functions and powers are concentrated in a single ministry. The MOEF currently holds authority over budget formulation, the establishment and coordination of economic and fiscal policies, tax reform, foreign exchange and treasury, and the management of public institutions. While ministries such as Agriculture, Food and Rural Affairs; Trade, Industry and Energy; Employment and Labor; and Health and Welfare each have their own jurisdictions, the MOEF oversees all ministries through its control over the budget. This has led to criticism of a "MOEF government." The concentration of both budget and policy coordination functions within a single ministry is at the heart of the restructuring debate. Kim Taeil, a professor of public administration at Korea University, pointed out, "With both planning and budgeting, as well as policy coordination functions housed in one ministry, there are inevitable structural limitations that cause budget allocation to prioritize economic policy over social policy."

The most prominent restructuring plan under discussion involves separating only the budgetary function and placing it directly under the president or the Office of the Prime Minister. There is growing concern that, if the budget function is placed directly under the president, as is the case with agencies like the National Intelligence Service or the Board of Audit and Inspection, budget formulation could be subject to political influence. The intention behind making the budget function an independent agency under the president appears to be to ensure that key national policy tasks are smoothly reflected in the budget. In this scenario, the personnel responsible for implementing national policy tasks (the "hands and feet" of budget formulation) would follow the president, while departments such as the Fiscal Policy and Management Bureau or the Public Policy Bureau would be excluded.

While this approach would clarify both the president's authority and responsibility over the budget, there are concerns that if the directly elected president becomes involved in the budget formulation process, it could undermine the principle of power distribution within the executive branch. Furthermore, populist fiscal projects aimed at winning votes could be heavily reflected in the budget, potentially worsening fiscal soundness.

When President Lee ran as a candidate in the 2022 presidential election, he cited the U.S. White House Office of Management and Budget (OMB) model as an example in advocating for the separation of the MOEF's budget function. In the United States, the OMB, which is directly under the White House, prepares the president's budget proposal, but the actual authority over budget formulation rests with Congress. There have been frequent instances where Congress, holding the power of the purse, has blocked the passage of budget bills, resulting in federal government shutdowns or the adoption of short-term budgets lasting only a few weeks. This highlights the strong oversight power that Congress holds over the federal government.

Unlike the United States, in Korea, the division of power with the legislature is weak, and the system operates with an executive-centered approach. With the ruling party controlling 167 seats as the largest party in the National Assembly, if the president were to exercise direct authority over the budget, it would be difficult for the National Assembly to fully exercise its budget review powers. This means that not only bureaucratic checks but also parliamentary oversight could be weakened. Many observers believe that President Lee included a pledge to strengthen the National Assembly's budget review authority in his policy platform as a preemptive measure to address such concerns.

As in the past under the Kim Daejung and Roh Moo-hyun administrations, another alternative being considered is to establish an independent Planning and Budget Office under the Prime Minister, rather than directly under the president. This model is similar to what the Democratic Party has proposed in several bills. Although this system lasted for nearly nine years from 1998 to 2008, it was eventually merged into the MOEF due to issues arising from the combination of budget and policy coordination functions. Kim Geunse, a professor of public administration at Sungkyunkwan University, said, "If the agency is placed under the Prime Minister rather than the president, concerns about the independence of budget formulation could be alleviated to some extent."

Will the Financial Supervisory System Be Overhauled... Or Will It Just Create More Bureaucratic Overlap?

Alongside the restructuring of the MOEF, it appears that the financial policy and supervisory system will also undergo changes. There are discussions about transferring the domestic financial policy functions of the Financial Services Commission (FSC) to the MOEF, while the FSC would revert to its pre-Lee Myungbak administration role as the Financial Supervisory Commission, focusing solely on supervisory policy. A new element in the current debate is the proposal to separate financial supervision from financial consumer protection. The Democratic Party has introduced a bill to establish an independent Financial Consumer Protection Agency (FCPO) by separating the financial consumer protection function from the Financial Supervisory Service (FSS). In his policy platform, President Lee pledged to strengthen institutional improvements for financial consumer protection, expand the scope of supervision, and significantly enhance the functions and independence of financial consumer protection agencies by granting them new inspection powers previously unavailable.

For financial companies, having to answer to both the FSS, which oversees financial supervision, and the FCPO, which is responsible for consumer protection, could result in overlapping regulations due to the separation of functions. However, the argument for separation has gained traction because the two functions have often conflicted when managed by a single agency. A ruling party official stated, "When one agency is responsible for both industrial policy and supervision, there has been a tendency for industrial policy to take precedence," adding, "The issue of separating the organizations to resolve conflicts between financial soundness regulations and consumer protection regulations will also be addressed in this round of government restructuring."

Reorganizing Government Agencies with Every President? ... How the U.S. and Japan Do It

If the restructuring to separate the MOEF's budget function is carried out within the year, it would mark the first time in 17 years since the MOEF was formed through the merger of the Planning and Budget Office and the Ministry of Finance and Economy under the Lee Myungbak administration in 2008 that the organization would be split into two. A government official stated, "The MOEF has repeatedly been split and merged with each change of administration, and each arrangement has its own strengths and weaknesses," adding, "Government reorganization reflects not only administrative efficiency but also the strategic considerations of how the administration will implement its core policy tasks."

However, frequent reorganizations can undermine government stability and entail significant costs. There are few countries where government agencies are reorganized with every change of president. In the United States, there have been no major reorganizations in its nearly 250-year history except for the creation of the Department of Homeland Security after the 9/11 terrorist attacks. In Japan, the only major reorganization since the Meiji Restoration was the 2001 restructuring of central ministries, which transformed the Ministry of Finance into the Ministry of Finance and Economy.