Concept of Vertical Fiscal Imbalance in the Analysis of Fiscal Sustainability at the Regional Level

Abstract

The paper analyzes the concept and indicator of vertical fiscal imbalance (VFI) and its capability in assessing the creditworthiness (debt sustainability) of Russian regions. It is found that VFI does not replace other indicators of debt and broader fiscal sustainability, but complements them by providing diagnostics of the balance of incoming and outgoing intergovernmental transfers in addition to the balance of expenditures and revenues (budget deficit). Vertical fiscal imbalance has a close inverse pair correlation with the share of own (tax and non-tax) revenues and fiscal capacity, and can therefore reflect creditworthiness (along with the amount of debt and capital expenditures). Technically, it is advisable to carry out an analysis using VFI with a recalculation accounting for subventions. It is concluded that vertical fiscal imbalance is an important element of the methodology of diagnosing fiscal sustainability. Further study of features of the concept, as well as the use of VFI in the analysis and regulation of intergovernmental relations, suggests a promising outlook.