AS I SEE THINGS: Research can guide budget process

The continuing weak monetary positions of most governments in the Caribbean have to be a major concern for not only our respective citizens but also for many regional and international institutions that have and continue to provide much needed technical and financial support to our countries as they seek against tight global economic conditions to protect and where feasible improve their social and economic well-being.
And as the recent Budgetary Proposals in Barbados confirm, our countries cannot continue along their current trajectory and still expect to be able to resolve their growing and potentially unsustainable fiscal situations. Hence, the logical outcome is the need for fiscal adjustments. But, what does this entail?
The answer is simple: A combination of revenue-raising measures where economically justifiable and expenditure-cutting strategies can have real positive impacts on fiscal deficits in the medium to long term.
Since these strategies usually come to the fore mostly once a year on average when national budgets are presented to our various parliaments for debates and ratification, any meaningful fiscal package designed to reduce the fiscal deficit must be cast against the backdrop of a sound understanding of the revenue-expenditure nexus in particular countries.
Theoretically, our approach to budgeting should, therefore, reflect one of four possible situations regarding the link between government’s revenue and expenditure; namely the: (i) causality from revenues to expenditures, (ii) causality from expenditures to revenue, (iii) bi-directional causality between expenditures and revenues and (iv) independence of expenditures and revenues.
Fortunately, modern empirical techniques do exist that would allow each country to determine the existing relationship between these two important fiscal variables.
But, what about the implications of the various hypotheses for sound fiscal management? For instance, the causality from revenues to expenditures implies that revenues change before expenditures. 
Increasing taxes will simply lead to more expenditure. This notion stems from the fact that expenditures adjust up and down to whatever level that can be supported by more revenues.    
Isn’t it logical that this sort of knowledge ought to be incorporated into the design and implementation of tax policies and by extension government’s budgetary proposals for sound fiscal management?
Furthermore, by deduction, a reduction in revenue will reduce expenditure.
Additionally, a shock in expenditure can generate a widening of the fiscal deficit. 
Hence, taken collectively, fiscal policies aimed at raising revenue and controlling expenditure growth should be pursued in an effort to curb fiscal deficits and potentially create fiscal sustainability.
Clearly, therefore, as governments learn more and more about the dynamics that exist between revenue and expenditure and incorporate new knowledge into the budgetary processes they will be able to practice sound fiscal management and that could only redound to the benefit of individuals, businesses, and economies as a whole.
Such outcomes are only possible if continuous research is carried out in specific countries and the relevant institutional factors pertinent to the budgetary processes are understood and appreciated.
Indeed, careful consideration and implementation of these suggestions will ultimately determine the feasibility our approaches to fiscal management as reflected in our annual budgetary exercises and whether we can eventually work through our ongoing predicament of rising fiscal deficits. Are we prepared to take heed?
• Brian M. Francis, PhD,  is a lecturer in the Department of Economics at the University of the West Indies Cave Hill Campus.