Transfer Payment

A transfer payment is a payment of money from one party to another for which no good or service is provided in return. The most common examples are government payments to households, such as state pensions, unemployment benefits, child allowances and cash assistance, but private gifts, charitable donations and money sent home by migrants are also transfers. Because a transfer redistributes existing income rather than paying for new production, it is not counted in GDP.

Transfers are a large part of modern government spending and a central tool of fiscal policy. In national accounts they are recorded separately from government purchases of goods and services, and in the balance of payments cross-border transfers appear in the secondary income account. They are the main channel through which welfare benefits reach households.

When a government pays a builder to fix a bridge, it gets a repaired bridge in return. When it pays a pension to a retired teacher, it gets nothing new back; it is simply moving money from taxpayers to the pensioner. That second kind of payment is a transfer.

A family does the same when parents send a monthly allowance to a child at university. No work is bought; money just changes hands within the family. Transfers do not create new goods by themselves, but they change who has money to spend, and that spending can then support jobs and businesses.

• Social insurance benefits. Payments linked to past contributions, such as US Social Security retirement and disability benefits or contributory unemployment insurance.
• Means-tested assistance. Payments to households below an income or asset limit, such as the UK's Universal Credit or US Supplemental Nutrition Assistance Program (SNAP) benefits.
• Universal or categorical payments. Payments to everyone in a group regardless of income, such as child benefits in many European countries, or proposals for a universal basic income.
• Conditional cash transfers. Payments made on condition that families meet requirements such as school attendance or health check-ups, pioneered by Mexico's Progresa in 1997 and Brazil's Bolsa Família from 2003.
• Business transfers. Certain subsidies and grants to firms, such as producer support payments to farmers, are transfers when they do not buy a service in return.
• Private transfers. Gifts, inheritances, charity and remittances; for many developing countries, migrant remittances are among the largest sources of foreign income.

Statisticians separate transfers from purchases because only purchases reflect new output. When a government pays a nurse's salary, it buys health services that are counted in GDP. When it pays a pension, the money is counted only when the pensioner spends it, as household consumption; counting it twice would overstate output. Transfers therefore affect disposable income and the distribution of income, but not GDP directly. In the United States the Bureau of Economic Analysis reports "personal current transfer receipts" as a component of personal income. Measures of poverty and inequality, such as the Gini coefficient, are often calculated both before and after taxes and transfers, which shows how much redistribution the system achieves.

How transfers reach people has changed sharply. India's Direct Benefit Transfer system, launched in 2013, pays subsidies and benefits straight into bank accounts linked to digital identity numbers, aiming to cut leakage through intermediaries. Pakistan's Benazir Income Support Programme, set up in 2008, pays quarterly cash to low-income women, increasingly through bank accounts and branchless banking agents. In parts of Africa and South Asia, mobile money wallets carry government-to-person payments. During the 2020 pandemic many governments, from the United States to Togo, used digital channels to send emergency transfers at speed, though gaps in account ownership left some households out.

Transfers support demand during downturns because benefit spending rises automatically as unemployment grows, acting as an automatic stabilizer. Because recipients often have a high marginal propensity to consume, transfers to low-income households tend to have a relatively large multiplier effect. Supporters also point to evidence that cash transfers improve child health and schooling.

Critics raise several concerns. Transfers must be financed by taxes or borrowing, adding to the national debt if not matched by revenue. Means-tested benefits that are withdrawn as earnings rise can create high effective tax rates that discourage work, a problem that welfare-to-work programs and the negative income tax are designed to address. Some economists in the public choice tradition argue that transfer programmes tend to grow because organized groups lobby for them. Population ageing is raising the cost of pension transfers in many countries, a pressure captured by the dependency ratio.

• U.S. Bureau of Economic Analysis
• OECD: Social spending