Fracking Could Reduce Budget Deficit

NCPA March 11, 2013

Stimulating the economy will drive tax revenues and reduce the budget. One way to stimulate the economy is to encourage hydraulic fracturing ("fracking"). Increasing natural gas production would shrink our trade deficit and reduce the budget deficit, says Bob McTeer, a distinguished fellow at the National Center for Policy Analysis.

• A reduction in U.S. demand for energy imports would reduce the net capital inflow required to finance the trade deficit.
• A reduction in capital inflow will reduce the gaps between domestic investment and saving and government expenditures and tax revenues.
• By reducing the gap between government and tax revenues, the deficit could be reduced.

These effects hinge on the fact that the sum of the budget deficit, the capital inflow to finance the trade deficit and the difference between domestic saving and domestic investment always equals zero. If any one of these inputs shrinks or expands, the other inputs will shrink or expand to maintain the net zero balance.

• Because income minus consumption gives us both total saving and total investment, we know that total saving must equal total investment.
• The largess of negative government saving drowns out personal saving and business saving, which creates negative national saving.
• Because we invest more than we save domestically, the imbalance between investment and savings is balanced by capital inflow from foreign savings, which finances the trade deficit.

This means that reducing the trade deficit will reduce the capital America imports to finance that trade deficit, which will put pressure on investment relative to saving and government saving relative to taxing. To correct for the extra pressure on investment and government saving, the deficit will likely get smaller.

• The Council on Foreign Relations estimates that U.S. gains from trade would total $4 billion annually.
• America is set to become a net natural gas exporter by 2020 and virtually self-sufficient in energy by 2035.

These trends suggest that encouraging fracking would create a surplus of liquid natural gas that would lower the deficit.

Sources: Bob McTeer, "How Fracking Can Reduce the Budget Deficit," Forbes, March 4, 2013. Nicolas Loris, "U.S. Natural Gas Exports: Lift Restrictions and Empower the States," Heritage Foundation, February 11, 2013.