Fiscal Imbalance

What we earn is not always what we spend...and the same goes for governments. A fiscal imbalance is when government expenditures are unequal with the revenue the government is bringing in.

Since governments have budgets and laws for taxation, a fiscal imbalance can be seen in advance. For instance, if a tax cut is paired with an increase in government spending, one can do the math to see how big the fiscal imbalance will be.

If a fiscal imbalance results in a deficit for many years, the government will eventually need to pay that down, with tax increases, spending cuts, or both. This is a “vertical” fiscal imbalance, where revenues and expenditures for a given government level are mismatched.

There’s also “horizontal” fiscal imbalance, which is where revenues and expenditures are mismatched regionally. For instance, if one region has high taxes, but little is being spent in that region (meaning one region’s taxes are being funneled into other regions on the reg), that’s an example of horizontal fiscal imbalance.