Vertical Imbalance in Fiscal Federalism A Hindrance to...

Vertical Imbalance in Fiscal Federalism: Fiscal federalism is a sub-field of public economics that focus on understanding the instruments and functions that are best centralized and effectively placed in the domain of decentralized governmental levels. In other words, this concept can be described as the study of how expenditures or competencies and revenues or financial instruments are distributed across various vertical layers of administration. As a result, this concept consists of a set of guidelines that are helpful in developing financial relations between the national and sub-national governmental levels. Notably, the notions of the concept of fiscal federalism are associated with both the vertical and horizontal financial relations. A vertical imbalance in fiscal federalism is normally identified as a hindrance to sub-national accountability and good financial performance. Actually, these imbalances are usually considered as being the reasons for sub-national financial profligacy and soft budget limitations. The vertical imbalances in fiscal federalism attract huge scrutiny during times of financial difficulties when deficits become persistent resulting in frequent bailouts. These sub-national bailouts can put severe strains on inter-governmental financial relations to an extent that re-centralization is used as a means to remove the vertical imbalance. Due to their impact on financial performance, understanding the vertical imbalances is crucial for the design of