Debates on sustainability of welfare state and financing of social expenditures have been heated, as social expenditures are expected to increase further. Demographic changes resulting from ageing population and low fertility are major factors for social expenditure growth, as pension and health expenditures for the old are to grow faster now on. In addition to the demographic changes, Korean society faces transitional stage in terms of welfare states. After experiencing fast economic development, the demand for welfare state and social integration has been expanded. The social want and demand substantiate electoral campaign pledges such as expansion of child care subsidy into all income classes.

Also, the paper examines the problem of tax-welfare churning and provides a potential way to reduce it. In modern welfare state, tax-welfare churning is perhaps one of the largest anomalies. Tax-welfare churning is said to occur when the government extracts taxes from people on one hand but then gives in it back to the same person in the form of transfer or welfare payments on the other hand. The case for removing tax-welfare churning is quite strong and thus it should be an obvious candidate for reform to achieve smaller government.

The paper proposes several suggestions to make better welfare policies, including setting up of ‘Committee on National Strategy’ and “Committee on Budget and Welfare Policy” in the legislative body, consolidation of budgetary ‘bags’(general and special accounts, funds, tax expenditures, and debt of public enterprises), introduction of Chief Performance Officer, ex post evaluation of major projects, and introduction of fiscal rules in the Constitution.