Fiscal imbalance explained

Fiscal imbalance is a mismatch in the revenue powers and expenditure responsibilities of a government.

Fiscal imbalances as differences in net fiscal benefits

A fiscal imbalance emerges when sub-national governments have different abilities to raise funds from their tax bases and to provide services. This creates differences in ‘net fiscal benefits’, which are a combination of levels of taxation and public services. It is these NFBs which are the main cause of horizontal fiscal disparities that in turn generate the need for equalization grants. Prominent among the objectives commonly attributed to intergovernmental fiscal transfers is ‘equalization’ of fiscal capacities or resolution of fiscal imbalances.^[1]

Thus, the transfer system can promote efficiency in the public sector and can level the field for intergovernmental competition.^[2] The discussion of fiscal imbalance and equalisation was of particular importance in the drafting of the new Iraqi constitution. It was a sticking point for the drafting process—with the oil rich regions seeking to minimise the reallocation of revenue while other regions sought to maximise equalisation payments.

See also

• Fiscal federalism
• Equalization payments
• Cyclical asymmetry

Nations:

• Fiscal imbalance in Australia
• Fiscal imbalance in Canada
• Fiscal imbalance in Nigeria

Further reading

• Bird, R. M. (2012). Subnational taxation in large emerging countries: BRIC plus one, International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1201, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

Notes and References

1. Book: Boadway, R. . 2000 . Recent Developments in the Economics of Federalism . Harvey . Lazar . Canada: The State of the Federation 1999–2000: Toward a New Mission Statement for Canadian Fiscal Federalism . Kingston . Institute of Intergovernmental Relations . 41–78 . 978-0-88911-843-0 . registration . https://archive.org/details/towardnewmission00laza/page/41 .
2. Book: Breton, A. . 1998 . Competitive Governments: An Economic Theory of Politics and Public Finance . New York . Cambridge University Press . 9780521646284 .