Fiscal imbalance is a mismatch in the revenue powers and expenditure responsibilities of a government. When the revenue powers are divided between two or more tiers of government in a federation (i.e. center, state, local). In general, the Central government is entrusted with more financial resources. This is because due to its functional responsibilities like defence, space research, pension etc.
There is always a greater demand for its expenditure requirement than its revenue resources. That can lead to Fiscal crisis where the government expenditure is much higher than government revenue.
Types of Fiscal Imbalance
There are two types of fiscal imbalances:- Vertical Fiscal Imbalance and Horizontal Fiscal Imbalance.
Vertical Fiscal Imbalance:- It is the fiscal imbalance measured between the two levels of government (Center and States or Provinces).
Horizontal Fiscal imbalance:- It is the fiscal imbalance measured between the governments at the same level. For e.g. local and state governments of two states.