In fiscal federalism, a vertical fiscal imbalance exists when:
Correct answer: B. Government levels have mismatched revenue and spending powers
- A. Different provinces have unequal tax bases
- B. Government levels have mismatched revenue and spending powers
- C. Public and private sectors have different wage rates
- D. Two taxes are imposed on the same income
Explanation
A vertical fiscal imbalance occurs when a level of government has spending responsibilities that do not match its own revenue-raising capacity. Transfers from another level of government are often used to address this gap.
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About Public Finance
Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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