What Is a Fiscal Imbalance?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 12 March 2018
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A fiscal imbalance is a mismatch between a government’s projected revenues and obligations. Governmental revenue can include taxes and fees, while obligations may involve debt service and funding specific agencies. Some state of fiscal imbalance tends to be natural, but radical disparities can create policy problems for the nation. It can also become a subject of public debate, as citizens may express opinions on the causes of the problem and the best solution.

When the imbalance is positive, it means revenues exceed expenses. On the surface, this may seem beneficial, but governments work very differently from personal finances. High revenues can indicate a burdensome tax rate which may create problems for citizens, who will have less money to save or spend because they’re submitting too much to the government. Likewise, fees and tariffs may be unacceptably high, which might make the nation less competitive in the global market.

Extreme negative fiscal imbalances are also a problem, indicating that a government does not have enough anticipated income to pay for its obligations. This might result in more borrowing to fund the provision of services. In a dire situation, the government might start to default on debt because it doesn’t have enough money to make the payments. Neighboring nations may express concern regarding how the fiscal imbalance impacts stability and the ongoing ability to participate in the market.

Vertical fiscal imbalances are associated with mismatches between different layers of government. A national government may have far money than individual states or provinces, which may need that money to offer services to their residents. Conversely, when the fiscal imbalance is horizontal, units of government at the same level have mismatched revenues and obligations. This can create problems with the administration of government and the continued success of specific government programs.

Policy makers work on budgeting and related activities to manage a fiscal imbalance. The goal is to promote healthy economic growth through fiscal policy that considers the government’s needs as well as those of the residents. It may be necessary to adapt to situational changes like economic uncertainty that leads to consumer panic or unrest, which could in turn destabilize government income. Political unrest could also lead to concerns about residents about whether the government can manage its debt obligations, and how the government should manage its finances. Uncertainty can make people like investors less active, which may contribute to dips in economic activity.



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