Horizontal and Vertical Fiscal Imbalance

Horizontal Fiscal Imbalance occurs when different regions or jurisdictions have unequal fiscal capacities despite having similar responsibilities. This means some areas can raise more revenue than others, leading to disparities in the quality of public services. Vertical Fiscal Imbalance, on the other hand, refers to the mismatch between the revenue-raising abilities of different levels of government (like federal, state, and local). Typically, higher levels of government collect more taxes but have responsibilities to provide funds for lower levels, which may not have enough income to meet their obligations. Both imbalances highlight financial disparities in governance and service delivery.