White Paper

Fiscal Imbalance: A Primer

The concept of fiscal imbalance is familiar to economists but less so to policymakers, politicians, and the public. Yet understanding this concept is essential to rational discussion of government financial health. This paper provides a primer on government fiscal imbalance.

The material is not new, and the presentation does not aim at those familiar with the topic. Instead, the paper reviews key principles and fundamental implications; it targets those who are interested in understanding the true state of government financial health but puzzled by apparently conflicting claims about whether the major economies are going bankrupt. This primer does not resolve those conflicts, but by explicating the concept of fiscal imbalance, and reviewing the relevant facts, the discussion provides a framework for evaluating the competing claims.

In January 2016 we published a more advanced report on the fiscal imbalance issue. U.S. Fiscal Imbalance over Time: This Time Is Different illustrates how the nation’s fiscal situation has been deteriorating since the mid 1960s, and will continue to do so if no adjustments occur.

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Jeffrey Miron is director of economic studies at the Cato Institute and the director of undergraduate studies in the Department of Economics at Harvard University.