Fiscal imbalance is a mismatch in the revenue powers and expenditure responsibilities of a government.
In the literature on fiscal federalism, two types of fiscal imbalances are measured: Vertical Fiscal Imbalance and Horizontal Fiscal Imbalance. When the fiscal imbalance is measured between the two levels of government (Centre and States or Provinces) it is called Vertical Fiscal Imbalance. When the fiscal imbalance is measured between the governments at the same level it is called Horizontal Fiscal imbalance. This imbalance is also known as regional disparity.
While Horizontal Fiscal Imbalance requires equalization transfers, Vertical Fiscal Imbalance is a structural issue and thus needs to be corrected by re-assignment of revenue and expenditure responsibilities between the two senior order of the governments.
Read more about Fiscal Imbalance: Horizontal Fiscal Imbalances As Differences in Net Fiscal Benefits, Vertical Fiscal Imbalance As A Particular Type of Fiscal Asymmetry