VIII. THE SECONDARY DISTRIBUTION OF INCOME ACCOUNT
B. Transfers
1. Introduction
| 8.27. | A transfer is defined as a transaction in which one institutional unit provides a good, service or asset to another unit without receiving from the latter any good, service or asset in return as counterpart. A cash transfer consists of the payment of currency or transferable deposit by one unit to another without any counterpart. A transfer in kind consists either of the transfer of ownership of a good or asset, other than cash, or the provision of a service, again without any counterpart. |
| 8.28. | A unit making a transfer receives no specific quantifiable benefit in return that can be recorded as part of the same transaction. Nevertheless, the payment of a social insurance contribution or non-life insurance premium may entitle the unit making the payment to some contingent future benefits. For example, a household may be entitled to receive some social benefits should certain events occur or certain conditions prevail. Alternatively, a household paying taxes may be able to consume certain collective services provided by government units. Such benefits, however, are generally uncertain or not quantifiable, or both. Moreover, the amount of benefit that may eventually be received by an individual unit may bear no relation to the amount of the transfers previously paid. The entitlement to contingent benefits or collective services cannot be treated as if it were itself some kind of asset that could be valued and recorded in the accounts. Hence, items such as non-life insurance premiums, social insurance contributions and taxes are treated in the accounts as transfers. |
| 8.29. | However, payments of premiums on individual life insurance policies taken out by members of households on their own initiative outside any social insurance scheme are not transfers. Similarly, the benefits received when the policies mature are not transfers. Holders of such life insurance policies themselves own the life insurance reserves administered by insurance enterprises into which the premiums are paid and out of which benefits are paid. Payments of premiums and premium supplements (less associated service charges) and the sums received on maturity are, therefore, not transfers between different institutional units. They constitute the acquisition and disposal of financial assets and are recorded as such in the financial accounts of the System as components of the change in the net equity of households in life insurance reserves and pension funds. |
| 8.30. | Households participating in funded pension schemes also own the pension reserves so that, in principle, pension contributions and benefits should also be treated in the same way as life insurance premiums and benefits. However, because the payment of pension contributions and the receipt of pensions are widely perceived by the households concerned and others as being transfers, and to avoid treating them differently from state pensions received under social security schemes, they are recorded in the secondary distribution of income accounts as if they were current transfers. In consequence, it is necessary to introduce an adjustment item in the use of income account (see Introduction to chapter IX) in order to ensure overall consistency between the income accounts and the financial accounts of the System. | | | Text refers to: table 8.1.  |
2. The distinction between current and capital transfers
| 8.31. | Transfers may be either current or capital. In order to distinguish one from the other, it is preferable to focus on the special characteristics of capital transfers. First, a transfer in kind is capital when it consists of the transfer of ownership of an asset, other than inventories. Secondly, a transfer of cash is capital when it is linked to, or conditional on, the acquisition or disposal of an asset (other than inventories) by one or both parties to the transaction, for example, an investment grant. Institutional units must be capable of distinguishing capital from current transfers and must be presumed to treat capital transferred during the course of the accounting period in the same way as capital held throughout the period. For example, a prudent household will not treat a capital transfer that happens to be received during a particular period as being wholly available for final consumption within the same accounting period. Conversely, a household making a capital transfer (e.g., the payment of an inheritance tax) will not plan to reduce its final consumption by the whole amount of the transfer. Unless institutional units are capable of distinguishing capital from current transfers and react differently to them, it becomes impossible to measure income, both in theory and in practice. |
| 8.32. | Current transfers consist of all transfers that are not transfers of capital. They directly affect the level of disposable income and should influence the consumption of goods or services. In practice, capital transfers tend to be large, infrequent and irregular, whereas current transfers tend to be comparatively small and are often made frequently and regularly. However, while size, frequency and regularity help to distinguish current from capital transfers they do not provide satisfactory criteria for defining the two types of transfer. For example, social security benefits in the form of maternity or death benefits are essentially current grants designed to cover the increased consumption expenditures occasioned by births or deaths, even though the events themselves are obviously very infrequent. |
| 8.33. | It is possible that some cash transfers may be regarded as capital by one party to the transaction and as current by the other. For example, the payment of an inheritance tax may be regarded as a capital transfer by the household but as a current transfer by government. Similarly, a large country that regularly makes investment grants to a number of smaller countries may regard the outlays as current, even though they may be specifically intended to finance the acquisition of assets. In an integrated system of accounts such as the SNA, however, it is not feasible to have the same transaction classified differently in different parts of the System. Accordingly, a transfer should be classified as capital for both parties if it clearly involves a transfer of an asset for one of the parties. |
3. The recording of transfers
| 8.34. | Although no good, service or asset is received in return as counterpart, the recording of a transfer nevertheless must give rise to four entries in the accounts. The ways in which transfers in cash, ordinary transfers in kind and social transfers in kind are recorded are shown below in the following paragraphs. |
Transfers in cash
| 8.35. | Below is an example of a current transfer in cash, such as the payment of a social security benefit in cash. The following entries are needed:
The transfer increases the disposable income of the household and reduces that of the social security fund. The eventual use of the cash by the household is recorded subsequently as a separate transaction. If the transfer were a capital transfer, it would be recorded in the capital account instead of the secondary distribution of income account. |
Transfers in kind, except social transfers in kind
| 8.36. | Below is an example of an enterprise producing medicines that donates some of its output free of charge to a charity (NPISH). The following entries are needed:
Although the transfer is in kind rather than cash, the recording of the transfer has the same impact on the disposable incomes of the NPISH and the enterprise as a transfer in cash. The acquisition of the medicine by the NPISH has to be recorded in the use of disposable income account as an imputed expenditure out of disposable income, in the same way as the acquisition of a good or service received as remuneration in kind. |
| 8.37. | A more complex variant involving two interrelated transactions occurs if enterprise A purchases the medicine from enterprise B and then gives it to an NPISH. Although A actually purchases the goods from B, they do not form part of A's intermediate consumption or capital formation. Nor can they be recorded as final consumption by A, since it is an enterprise. In this case, the following entries are needed:
As in the previous case, the disposable income of the NPISH receiving the transfer in kind is increased by the transfer, an imputed expenditure of equal value being recorded in the use of disposable income account. |
Social transfers in kind
| 8.38. | In the System, final consumption expenditure is incurred only by general government, NPISHs and households. All of households' consumption expenditure is incurred on their own behalf. Consumption expenditure by general government, on the other hand, is either for the benefit of the community at large (collective consumption) or for the benefit of individual households. By convention, all consumption expenditure by NPISHs is treated as being for the benefit of individual households. This distinction between collective and individual consumption expenditure is of considerable importance in the System and is discussed in detail in chapter IX. Consumption expenditures by general government and NPISHs on behalf of households (their individual consumption expenditures) are undertaken for the purpose of making social transfers in kind. They cover the non-market output of both general government and NPISHs delivered to households free, or at prices that are not economically significant, as well as goods and services bought from market producers and provided to households free or at prices that are not economically significant. Social transfers in kind are recorded differently from other transfers in kind. |
| 8.39. | Below is an example of an education service provided to a household by a non-market producer owned by a government unit. The provision of the service is actually recorded twice in the accounts of the System. First, it is recorded in the traditional way in national accounting as production for own final consumption expenditure by government. As this is recorded as an internal transaction within government, it leads to only two, not four entries, in the accounts, both being recorded under general government:
This method of recording ignores, and obscures, the fact that in the real economy the education service is actually provided to a household as a transfer in kind paid for by government. A second method of recording is, therefore, also now adopted in the System that recognizes this fact. The following four entries are needed in this second method:
In this case the consumption of the education service must be recorded as actual consumption (i.e., the acquisition of the service) and not as imputed consumption expenditure because the expenditure has already been attributed to the government in the use of disposable income account. The distinction between actual consumption and consumption expenditure for households, general government and NPISHs is further elaborated in chapter IX. However, this distinction is not recognized in the System for other current transfers in kind for which the acquisition of the good or service is always recorded as involving both the receipt of a transfer and an imputed expenditure by the recipient. In consequence, current transfers in kind, except social transfers, received by households or other institutional units such as NPISHs are recorded in the secondary distribution of income account and therefore affect disposable income. |
| 8.40. | Finally, the more complex case involving two interrelated transactions in which a government unit, or NPISH, purchases a good or service, such as a medicine, from a market producer and then provides it free to a household, may be illustrated. The following six entries are needed:
This example also covers the case in which the household purchases the medicine directly from a pharmacist and is then reimbursed by a social security fund or other government unit or NPISH. In this case, the household is not recorded as actually incurring any expenditure, the expenditure being attributed to social security fund or other unit that ultimately bears the cost. |
4.The treatment of transfers in kind: summary
| 8.41. | Two separate accounts exist in the System to allow for the special recording of social transfers in kind. The transfers as such are recorded in the redistribution of income in kind account under resources for households and under uses for the government unit or NPISH making the transfer. The consumption of the goods and services transferred is recorded in the use of adjusted disposable income account. | | | Text refers to: table 8.2. |
| 8.42. | All other transfers in kind are recorded in the secondary distribution of income account along with those taking place in cash. The goods and services transferred are recorded as consumption expenditures by the recipients in the use of disposable income account. | | | Text refers to: table 8.1. |
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