Transfer payment

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Unlike the exchange transaction which mutually benefits all the parties involved in it, the transfer payment consists of a donor and a recipient, with the donor giving up something of value without receiving anything in return. Transfers can be made both between individuals and entities, such as private companies or governmental bodies. These transactions can be both voluntary or involuntary and are generally motivated either by the altruism of the donor or the malevolence of the recipient. [1]

Trade Exchange of goods and services.

Trade involves the transfer of goods or services from one person or entity to another, often in exchange for money. A system or network that allows trade is called a market.


In economics, a transfer payment (or government transfer or simply transfer) is a redistribution of income and wealth by means of the government making a payment, without goods or services being received in return. These payments are considered to be non-exhaustive because they do not directly absorb resources or create output. [2] Examples of transfer payments include welfare, financial aid, social security, and government making subsidies for certain businesses.

Economics Social science that analyzes the production, distribution, and consumption of goods and services

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Redistribution of income and wealth transfer of income and of wealth from some individuals to others

Redistribution of income and redistribution of wealth are respectively the transfer of income and of wealth from some individuals to others by means of a social mechanism such as taxation, charity, welfare, public services, land reform, monetary policies, confiscation, divorce or tort law. The term typically refers to redistribution on an economy-wide basis rather than between selected individuals.

In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, finished goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relationship called the production function. There are four basic resources or factors of Production: land, Labour, enterprise and Capital. The factors are also frequently labeled "producer goods or services" to distinguish them from the goods or services purchased by consumers, which are frequently labeled "consumer goods".

For the purpose of calculating gross domestic product (GDP), government spending does not include transfer payments, which are the reallocation of money from one party to another rather than expenditure on newly produced goods and services. [3]

Gross domestic product market value of goods and services produced within a country

Gross domestic products (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period, often annually. GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing living standards between nations, while Nominal GDP is more useful comparing national economies on the international market.

Criticism of transfer payments

A criticism of transfer payments is that they do not produce outcomes that are economically advantageous. Governments pool taxes and other sources of revenue together and spend the money to further a certain agenda. Some of the spending pays for goods and services, such as buildings, equipment, and government worker salaries. These expenditures are exchanges in which money is traded for something with a recognized value. The payments may be viewed as boosting industrial activity and employment. However, government transfer payments do not boost production or economic activity. For example, foreign aid does not necessarily prompt foreign trade. [4] Additionally, some argue that welfare programs, such as unemployment benefits and social security, reduce incentives to take paid work.

A tax is a compulsory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent. The first known taxation took place in Ancient Egypt around 3000–2800 BC.

Government revenue Government income, usually in the form of taxes

Government revenue is the money received by a government from taxes and non-tax sources to enable it to undertake government expenditures.

Employment Relationship between the employee and the employer

Employment is a relationship between two parties, usually based on a contract where work is paid for, where one party, which may be a corporation, for profit, not-for-profit organization, co-operative or other entity is the employer and the other is the employee. Employees work in return for payment, which may be in the form of an hourly wage, by piecework or an annual salary, depending on the type of work an employee does or which sector they are working in. Employees in some fields or sectors may receive gratuities, bonus payment or stock options. In some types of employment, employees may receive benefits in addition to payment. Benefits can include health insurance, housing, disability insurance or use of a gym. Employment is typically governed by employment laws, organisation or legal contracts.

Furthermore, the macroeconomic effect of transfer payments is reduced in the lower income countries and regions/states. The reasons for such disparity are the following: [5]

Methods of payment


More than 100 million poor people worldwide receive a government transfer payment. It is estimated that 90% of high-income nations make these payments via electronic transfer methods, whereas over half of the world's developing countries utilizes paper payments such as cash or checks. Transfer payment via cash is the most popular method of transferring benefits to beneficiaries. However, cash transfer programs are constrained by three factors: financial resources, institutional capacity, and ideology, particularly in countries in the Global South. [6] Many governments in poorer countries, where cash transfers could potentially have the most impressive impact, are often unwilling to implement such programmes due to fears of inflation and more importantly, dependency on the transfers. [7]

Global South term used in transnational and postcolonial studies to refer to developing countries

The Global South is an emerging term used by the World Bank to refer to low and middle income countries located in Asia, Africa, Latin America and the Caribbean which contrast to the high income nations of the Global North.

Inflation increase in the general price level of goods and services in an economy over a period of time

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time.

Dependency theory is the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former. It is a central contention of dependency theory that poor states are impoverished and rich ones enriched by the way poor states are integrated into the "world system".

In-kind transfer

In-kind transfer payments consist of individual goods and services provided to households by governmental bodies and non-profit institutions serving households (NPISHs), which are either acquired on the market or produced as non-market output by governmental bodies or NPISHs. [8]

The items included are:

Social security benefit

Primarily, social security benefits are designed to provide income continuity to those persons who have retired from labour force because of either inability to work (physical disability or mental trauma), to find employment or due to old age (retirement).

These include, but are not limited to: [5] [9]

Around the globe


In Australia, the horizontal fiscal imbalance arises because of the mismatch between the tax revenues and government expenses for the various state and territorial governments. This imbalance is addressed by a horizontal fiscal equalisation (HFE) policy overseen by the Commonwealth Grants Commission.


In Canada, Federal-Provincial transfers usually refer to a system of payments from the federal government to the provinces as part of Canada's "fiscal federalism" through explicit and implicit redistribution. [10] These transfers are intended to assist provinces with less fiscal capacity than others in providing comparable public services in all regions, including health and education. [10] Transfers include explicit programs such as equalization payments, Canada Health Transfer (CHT) and the Canada Social Transfer (CST) (formerly the Canada Health and Social Transfer) and Territorial Formula Financing. There are also implicit transfers that result from federal taxation and spending decisions and policies. [10]

Canada's transfer payments originated in the British North America Act (1867)'s Sections 118 as provincial subsidies. [10] By 1907, these payments were altered as new provinces joined the Dominion. [10] In a 1957 arrangement, poorer provinces received annual payments: Prince Edward Island received $2.5 million and the three provinces, Newfoundland, Nova Scotia, and New Brunswick each received $7.5 million. [10] These payments ended and were rolled into the 1967 equalization program intended to "enable each province to provide an adequate level of public services without resort to rates of taxation substantially higher than those of other provinces." [10]

In Canada, transfers payments are contentious and equalization formulas are often revised. [10] Implicit transfers through federal taxation, for example, are greater in higher income provinces such as British Columbia, Alberta, Saskatchewan, and Ontario and lower in provinces such as Manitoba, Quebec, and the Atlantic provinces. Canada measures average fiscal capacity of each province which varies widely. Alberta is the highest at $12,577 per person and PEI is the lowest at $6,013 per person. In 2016 federal income tax in Alberta was more than $8,000 compared to less than $3,000 in PEI. All provinces pay the same federal tax rates. [10]

Economist Trevor Tombe's wrote that by 2018, transfer payments had become "complex arrangements" that are much larger than the original subsidies and are "more equally distributed". [10] By 2018, inter-provincial redistribution has decreased to less than 2% of Canada's GDP, its lowest in 60 years. In the early 1980s it was 3.5%. [10]


Since July 2011, existing regional and local social security schemes, including pooling arrangements, are gradually being unified under the country's first national law on social transfer payments. The government aims to establish a comprehensive, equitable, and unified pension system that covers both urban and rural residents by 2020. In 2016, the government decided to establish a unified health insurance system for both rural and non-salaried urban residents. The government has also announced that medical insurance and maternity insurance programs will be merged. [11]


India has four types of social transfer payments – old age and disability benefits, sickness and maternity benefits, work injury transfers, and unemployment benefits. Most sources of payments are employers (via provident funds), and the government. [12]

United States

The U.S. still utilizes paper transfer payments in its Social Security administration as many recipients, particularly those in lower-income categories, are unbanked, i.e. do not have a bank account to facilitate direct deposits. However, the U.S. has been able to implement electronic transfer systems in its food stamps and education assistance programs. [13]

See also

Related Research Articles

Social security action programs of government intended to promote the welfare of the population through assistance measures

Social security is "any government system that provides monetary assistance to people with an inadequate or no income". In the United States, this is usually called welfare or a social safety net, especially when talking about Canada and European countries.

Welfare is a type of government support for the citizens of that society. Welfare may be provided to people of any income level, as with social security, but it is usually intended to ensure that people can meet their basic human needs such as food and shelter. Welfare attempts to provide a minimal level of well-being, usually either a free- or a subsidized-supply of certain goods and social services, such as healthcare, education, and vocational training.

Public finance public finance in economics

Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.

Unemployment benefits are payments made by authorized bodies to unemployed people. In the United States, benefits are funded by a compulsory governmental insurance system, not taxes on individual citizens. Depending on the jurisdiction and the status of the person, those sums may be small, covering only basic needs, or may compensate the lost time proportionally to the previous earned salary.

Equalization payments are cash payments made in some federal systems of government from the federal government to subnational governments with the objective of offsetting differences in available revenue or in the cost of providing services. Many federations use fiscal equalisation to reduce the inequalities in the fiscal capacities of sub-national governments arising from the differences in their geography, demography, natural endowments and economies. The level of equalisation sought can vary, however.

The Canada Health and Social Transfer (CHST) was a system of block transfer payments from the Canadian government to provincial governments to pay for health care, post-secondary education and welfare, in place from the 1996-97 fiscal year until the 2004-05 fiscal year. It was split into the Canada Health Transfer (CHT) and Canada Social Transfer (CST) effective April 1, 2004, to provide greater accountability and transparency for federal health funding.

A means test is a determination of whether an individual or family is eligible for government assistance, based upon whether the individual or family possesses the means to do without that help.

Railroad Retirement Board United States government agency

The U.S. Railroad Retirement Board (RRB) is an independent agency in the executive branch of the United States government created in 1935 to administer a social insurance program providing retirement benefits to the country's railroad workers.

Government spending Government consumption, investment, and transfer payments

Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting the acquisition by governments of goods and services for current use, to directly satisfy the individual or collective needs of the community, is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment. These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product.

Social welfare, assistance for the ill or otherwise disabled and the old, has long been provided in Japan by both the government and private companies. Beginning in the 1920s, the Japanese government enacted a series of welfare programs, based mainly on European models, to provide medical care and financial support. During the post-war period, a comprehensive system of social security was gradually established.

The Indian government has, since war, subsidised many industries and products, from fuel to gas.

The Canada Health Transfer (CHT) is the Canadian government's transfer payment program in support of the health systems of the provinces and territories of Canada. The program was originally combined with the Canada Social Transfer in a program known as the Canada Health and Social Transfer. It was made independent from the Canada Health and Social Transfer program on April 1, 2004 to allow for greater accountability and transparency for federal health funding led by then prime minister Paul Martin.

Social programs in Canada include all government programs designed to give assistance to citizens outside what the market provides. The Canadian social safety net covers a broad spectrum of programs, and because Canada is a federation, many are run by the provinces. Canada has a wide range of government transfer payments to individuals, which totaled $176.6 billion in 2009. Only social programs that direct funds to individuals are included in that cost; programs such as medicare and public education are additional costs.

The hidden welfare state is a term coined by Christopher Howard, professor of government at the College of William and Mary, to refer to tax expenditures with social welfare objectives that are often not included in discussions about the U.S. welfare state. Howard's terminology implies that "visible" social welfare programs are designed to help the neediest, but the "hidden" programs often offer benefits to wealthier individuals and companies.

Transfer payments are a collection of payments made by the Government of Canada to Canadian Provinces and Territories under the Federal-Provincial Arrangements Act. Chief among these are the Canada Social Transfer, the Canada Health Transfer and equalization payments. The last of these can be spent however the receiving provinces see fit, while the first two are intended to support social and health services respectively.

Welfare in France includes all systems whose purpose is to protect people against the financial consequences of social risks.

Social programs in the United States

Social programs in the United States are welfare subsidies designed to meet needs of the American population. Federal and state welfare programs include cash assistance, healthcare and medical provisions, food assistance, housing subsidies, energy and utilities subsidies, education and childcare assistance, and subsidies and assistance for other basic services. Private provisions from employers, either mandated by policy or voluntary, also provide similar social welfare benefits.

In Canada, the federal government makes equalization payments to provincial governments to help address fiscal disparities among Canadian provinces based on estimates of provinces' fiscal capacity—their ability to generate tax revenues. A province that does not receive equalization payments is often referred to as a "have province", while one that does is called a "have not province". In 2018–19, six provinces will receive $18.958 billion in equalization payments from the federal government.

Welfare in Finland

Social security in Finland, or welfare in Finland, is, compared to other countries’, very comprehensive. In the late 1980s, Finland had one of the world's most advanced welfare systems, one that guaranteed decent living conditions for all Finns. Since then social security has been cut back, but still the system is one of the most comprehensive in the world. Created almost entirely during the first three decades after World War II, the social security system was an outgrowth of the traditional Nordic belief that the state was not inherently hostile to the well-being of its citizens, but could intervene benevolently on their behalf. According to some social historians, the basis of this belief was a relatively benign history that had allowed the gradual emergence of a free and independent peasantry in the Nordic countries and had curtailed the dominance of the nobility and the subsequent formation of a powerful right wing. Finland's history has been harsher than the histories of the other Nordic countries, but not harsh enough to bar the country from following their path of social development.


  1. Lampman, Robert J. (2016), "Transfer Payments", The New Palgrave Dictionary of Economics, Palgrave Macmillan UK, pp. 1–3, doi:10.1057/978-1-349-95121-5_1755-1, ISBN   9781349951215
  2. Bishop, Matthew (2012). "Economics A–Z terms beginning with T –transfer". The Economist. Retrieved 11 July 2012. Payments that are made without any good or service being received in return. Much Public Spending goes on transfers, such as pensions and WELFARE benefits. Private-sector transfers include charitable donations and prizes to lottery winners.
  3. Hall, Robert E.; Lieberman, Marc (2012). "Chapter 6: Production, Income, and Employment". Macroeconomics: Principles and Applications. Cengage Learning. p. 145. ISBN   978-1-111-82235-4.
  4. Evans, Kim Masters (2014). "Transfer Payments," Encyclopedia of Business and Finance. Gale. pp. 750–752.
  5. 1 2 Smeeding, Timothy M. (1977). "The Antipoverty Effectiveness of In-Kind Transfers". The Journal of Human Resources. 12 (3): 360–378. doi:10.2307/145496. ISSN   0022-166X. JSTOR   145496.
  6. Slater, Rachel; Farrington, John (November 27, 2009). "Cash Transfers: Targeting". Overseas Development Institute. Archived from the original on July 4, 2011.
  7. McCord, Anna (November 2009). "Cash Transfers and Political Economy in Sub-Saharan Africa". Overseas Development Institute. Archived from the original on 2011-07-04.
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  9. "Benefits | Social Security Administration". Retrieved 2019-04-28.
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