Vertical Federal Fiscal Imbalance:

If there is no adequacy between revenue resources and expenditure responsibilities of a government is known as fiscal imbalance.  Fiscal imbalances are of two types - Vertical and Horizontal Fiscal Imbalances. In a federation, vertical fiscal imbalance means the existence of non-correspondence between the revenue resources and expenditure commitments of the federal governments vis-à-vis the state governments put together. In almost all federations the central governments are having surplus fiscal resources compared to their expenditure commitments. They make fiscal transfers on the basis of constitutional provisions or agreements, in the form of shared  tax revenue and grants with a view to reduce vertical fiscal imbalance. Mere increase in the volume of fiscal transfers to states would reduce this fiscal imbalance. But the other type of fiscal imbalance is horizontal fiscal imbalance which is more acute in several federations.