Senate votes to dedicate TARP funds to deficit

WASHINGTON (Reuters) - The U.S. Senate unanimously approved a measure on Tuesday that would require the government to use money paid back from banks and other bailed-out companies for deficit reduction, not additional spending.

The proposal, which passed by voice vote, could clash with Democratic plans to use some of the money recovered under the Troubled Asset Relief Program to stimulate the economy.

Republicans have argued that the recovered money should be used to pay down the budget deficit, which could hit a record $1.5 trillion this fiscal year. Earlier this year, the Senate rejected a Republican proposal that would have ended the TARP program.

If it becomes law, the measure would reduce the size of the TARP program from $700 billion to $550 billion and prevent the Treasury Department from redirecting unused funds toward new programs.

The Obama administration has proposed using $30 billion to end a credit drought for small businesses, while the Democratic-controlled House of Representatives passed a bill in December that would use $75 billion of recovered TARP funds for job creation efforts.

The measure, sponsored by Democratic Senator Michael Bennet, was added to a sweeping rewrite of financial regulations that is expected to pass the Senate in the next few weeks.

The TARP fund was set up in 2008 with congressional approval to throw a lifeline to struggling banks at the height of the financial crisis. It was also used to bail out troubled automakers General Motors Co and Chrysler LLC.

Though economists say the bailout helped avert a depression, it has proven toxic with voters. Utah Republican Senator Bob Bennett lost a primary challenge this weekend, in part because of his support of the TARP program.

As of March 31, 77 TARP recipients had returned $181 billion to the U.S. Treasury, Bennet said.

Estimates of TARP's eventual cost to taxpayers have ranged from $109 billion to $117 billion.

Bennet's measure also would direct the government to use any money it gets from selling assets of bailed-out mortgage giants Fannie Mae and Freddie Mac to be applied to deficit reduction.

Funds from a separate $863 billion economic stimulus package year would also go toward paying down the deficit if they are not used by January 2013.

(Reporting by Andy Sullivan; Editing by Eric Walsh)