FISCAL IMBALANCE

A situation where all of the future debt obligations of a government are different from the future income streams. Both of the obligations and the income streams are measured at their respective present values, and will be discounted at the risk free rate plus a certain spread.

A vertical fiscal imbalance describes a situation where revenues do not match expenditures for different levels of government. A horizontal imbalance describes a situation where revenues do not match expenditures for different regions of the country.

To measure the fiscal imbalance, take the difference between the present value of all future debt and the present value of all income streams.

At any given time, there will be a fiscal imbalance for a particular government; a sustained and positive balance will be detrimental to society and the economy. If there is a sustained positive fiscal imbalance, then tax revenues will likely increase in the future, causing both current and future household consumption to fall.