WASHINGTON - The Obama administration is weighing how a $700 billion financial rescue fund could be used to ease the U.S. debt burden, the White House budget director said on Thursday, as data showed the deficit had deepened.

We're reorienting TARP toward assistance for responsible families and lending for small businesses, said Office of Management and Budget Director Peter Orszag.

And the question that arises as part of that is whether, while maintaining flexibility to deal with future financial crises, one can also free up some resources for debt reduction. But we'll have more to say about that later, he told reporters at the Bloomberg Washington Summit.

The U.S. budget gap hit a record $1.4 trillion in the fiscal year that closed at the end of September. At 10 percent of U.S. GDP, it was the largest since World War Two.

In addition, the Treasury Department said on Thursday that the new fiscal year started off with a record shortfall for the month of October, marking the first time the nation had recorded 13 straight months with deficits.

The Troubled Asset Relief Program (TARP) was created in the heat of last year's financial crisis to shore up the banking system after investment bank Lehman Brothers failed. Around $210 billion remains available, including $70 billion repaid by banks that have since been able to raise private capital.

A U.S. Treasury source told Reuters the administration was unlikely to need the entire $700 billion that Congress had authorized, as it shifts the focus of the program toward helping small businesses and the housing sector rather than large banks.

As that focus shifts, we expect to use significantly less TARP funding than authorized, the source said. We will maintain the flexibility to deal with a future crisis, and uninvested TARP money is dedicated to reducing the debt. This is currently required by law.

Republican Senator Judd Gregg, who helped write the TARP law, said in a telephone interview that the plan was a new level of illusory budgeting because it would count as debt reduction money that was never spent in the first place.

It's like saying, 'I just saved money because I didn't buy a car ... when I was never going to buy the car, said Gregg, who wants to end the program entirely rather than allow the White House to use the money for other purposes.


The deficit has soared after the worst recession in 70 years crushed official revenues from taxes, as well as tax cuts by Obama's Republican predecessor George W Bush, and Obama's $787 billion emergency spending bill to restart growth.

Massive budget deficits could unnerve investors, worried that they spell additional government bond issuance to finance the funding gap, and the White House has said it plans to use the 2011 budget as a blueprint to improve the fiscal position.

Two separate sources familiar with the budget process said the White House had asked spending agencies to prepare two scenarios for the fiscal 2011 budget, one based on a spending freeze and a second based on a 5 percent spending cut.

Orszag declined to talk in specifics, but made plain that his department was focused closely on spending management.

This is part of the normal process where you send out to agencies a request for them to configure their budgets in different ways so that we can then, if we choose to do X or Y, we have their suggestions about the best way to get there. I don't want to fast forward beyond that, Orszag said.

However, he also stressed that the Obama White House was sensitive to the risk of undermining an economic recovery by tightening the budget belt too soon.

What we're trying to do as part of this fiscal year 2011 (budget process) is find the path from short term assistance that's necessary to keep the economy from collapsing ... on the other hand getting ahead of the fiscal problem we will face in 2015, 2016, 2017, he said.

(Additional reporting by Glenn Somerville in Singapore; writing by Alister Bull, editing by Vicki Allen and Cynthia Osterman)