Transfer Payment
A transfer payment is a payment made by a government to individuals or organisations for which no goods or services are provided in exchange. Transfer payments redistribute income rather than purchasing output, and they are a major component of government spending in modern welfare states.[1]
Definition
A transfer payment is a one-way payment—funds are transferred from the government to recipients without any corresponding production or exchange. Common examples include pensions, unemployment benefits, disability payments, and social assistance. Because they do not represent payment for current production, transfer payments are excluded from the calculation of gross domestic product by the expenditure approach.[1]
Types
| Type | Examples |
|---|---|
| Old-age and survivors' benefits | Public pensions. |
| Unemployment benefits | Payments to those without work. |
| Health and disability benefits | Medical and disability support. |
| Family and child benefits | Allowances for families. |
| Social assistance | Means-tested income support. |
Economic role
Transfer payments serve several functions:
- Redistribution — they shift income from higher- to lower-income households.
- Stabilisation — they act as automatic stabilisers, rising in downturns and falling in expansions, which helps to smooth the business cycle.
- Poverty reduction — they provide a safety net for vulnerable groups.