Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, an ...
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fin ...
, a transfer payment (also called a government transfer or simply transfer) is a
redistribution of income and wealth
Redistribution of income and wealth is the transfer of income and wealth (including physical property) from some individuals to others through a social mechanism such as taxation, welfare, public services, land reform, monetary policies, confi ...
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
Resource refers to all the materials available in our environment which are technologically accessible, economically feasible and culturally sustainable and help us to satisfy our needs and wants. Resources can broadly be classified upon their ...
Output may refer to:
* The information produced by a computer, see Input/output
* An output state of a system, see state (computer science)
* Output (economics), the amount of goods and services produced
** Gross output in economics, the value of ...
. Examples of transfer payments include welfare, financial aid
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
, and government
A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the ter ...
Business is the practice of making one's living or making money by producing or buying and selling products (such as goods and services). It is also "any activity or enterprise entered into for profit."
Having a business name does not separa ...
Exchange may refer to:
*Gas exchange is the movement of oxygen and carbon dioxide molecules from a region of higher concentration to a region of lower concentration. Places United States
* Exchange, Indiana, an unincorporated community
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
A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared g ...
or governmental bodies
. These transactions can be both voluntary or involuntary and are generally motivated either by the
Altruism is the principle and moral practice of concern for the welfare and/or happiness of other human beings or animals, resulting in a quality of life both material and spiritual. It is a traditional virtue in many cultures and a core as ...
of the donor or the malevolence of the recipient.
For the purpose of calculating
gross domestic product
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is oft ...
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 ...
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.
A criticism of transfer payments is that they do not produce outcomes that are economically advantageous. Governments pool
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...
es 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
Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any ...
. However, government transfer payments do not boost production or economic activity. For example, foreign aid does not necessarily prompt foreign trade. Additionally, some argue that welfare program
s, such as unemployment benefits, reduce incentives to take paid work.
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:
* the level of transfer payments is subject to the fiscal capacities of the administering entity
* the size of transfer payments is generally dependent on the previous earnings of the beneficiary
* largest share of transfer payments is typically administered to the older age groups, which constitute to a smallest share of population of the lower income countries, regions or states
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
The concept of Global North and Global South (or North–South divide in a global context) is used to describe a grouping of countries along socio-economic and political characteristics. The Global South is a term often used to identify regi ...
. 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
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
and more importantly, dependency
on the transfers.
In-kind The term in kind (or in-kind) generally refers to goods, services, and transactions not involving money or not measured in monetary terms. It is a part of many spheres, mainly economics, finance, but also politics, work career, food, health and othe ...
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.
The items included are:
* Social security benefits, reimbursements
* Other social security benefits in kind (e.g. food stamps)
* Social assistance benefits in kind
* Transfers of individual non-market goods or services
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:
* Unemployment compensations
* Old age insurance
* Civil service pensions
* State and local government pensions
* Survivors benefits
* Supplemental Security Income
Around the globe
In Australia, the horizontal
fiscal imbalance Fiscal imbalance is a mismatch in the revenue powers and expenditure responsibilities of a government.
In the literature on fiscal federalism, two types of fiscal imbalances are measured: Vertical Fiscal Imbalance and Horizontal Fiscal Imbalance. W ...
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
A province is almost always an administrative division within a country or state. The term derives from the ancient Roman '' provincia'', which was the major territorial and administrative unit of the Roman Empire's territorial possessions outs ...
s as part of Canada's "fiscal federalism" through explicit and implicit redistribution.
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.
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.
Canada's transfer payments originated in the British North America Act (1867)
's Sections 118 as provincial subsidies.
By 1907, these payments were altered as new provinces joined the Dominion.
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.
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."
In Canada, transfers payments are contentious and equalization formulas are often revised.
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.
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".
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%.
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.
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 fund
s), and the government.
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.
The Barnett formula is a mechanism used by the Treasury in the United Kingdom to automatically adjust the amounts of public expenditure allocated to Northern Ireland, Scotland and Wales to reflect changes in spending levels allocated to public se ...
A government budget is a document prepared by the government and/or other political entity presenting its anticipated tax revenues (Inheritance tax, income tax, corporation tax, import taxes) and proposed spending/expenditure (Healthcare, Educa ...
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 ach ...
* Transfer payments multiplier
A welfare state is a form of government in which the state (or a well-established network of social institutions) protects and promotes the economic and social well-being of its citizens, based upon the principles of equal opportunity, equitab ...
Workfare is a governmental plan under which welfare recipients are required to accept public-service jobs or to participate in job training. Many countries around the world have adopted workfare (sometimes implemented as "work-first" policies) t ...
Department of Finance (Canada): Federal Transfers to Provinces and Territories
Government in Canada
Taxation and redistribution