The projected long-term cost of the U.S. government's bailout of the nation's big banks is going to be at least $200 billion less than previously thought, a Treasury Department official said on Sunday night.

The Obama administration had estimated the cost to taxpayers of the $700-billion Troubled Asset relief Program, or TARP, would be $341 billion but now says it can cut that by $200 billion.

That improvement is driven by the fact that Treasury's investments to stabilize the system are delivering higher returns than anticipated and that Treasury does not anticipate having to draw upon the full $700 billion in TARP authority, the Treasury official said.

Congress approved the TARP program when the financial crisis was raging last year so that the government could inject money into ailing banks and keep them from dragging the whole financial system down.

It has never been popular politically so the administration is eager for any good news to tamp down anger at the bailouts.

With financial markets now firming up and banks lining up to repay their TARP funds, Treasury will have some room to consider whether and how some TARP funds can be used for other purposes like job creation and deficit reduction.

Taxpayers will pay less than previously thought, and the deficit and debt will be lower, Treasury said.

The budget deficit hit a record $1.4 trillion in fiscal 2009 and is expected to be around the same in fiscal 2010 because of the government's huge borrowing needs.

Banks are eager to repay their bailout money in order to free themselves from government-set restrictions on pay that they fear will make them less competitive in relation to banks that have already exited the TARP program.

In the past week, Bank of America said it intends to repay $45 billion of TARP funds and, once that happens, some $116 billion of bailout funds will have been repaid. Treasury said it now estimates that $175 billion will be repaid by the end of 2010.

Citigroup Inc is trying to persuade the U.S. government to allow it to repay $20 billion in taxpayer funds before a window to launch a share sale effectively shuts by the middle of next week, the Financial Times reported on Sunday.

The government used TARP funds to prop up banks as well as to invest in some industrial firms like General Motors. It is receiving interest and dividend payments from firms that it invested in but there still will be long-term costs.

President Obama is scheduled to deliver a speech on job creation on Tuesday and it is anticipated that he will discuss using TARP funds for job creation. There are objections to doing so from some Capitol Hill Republicans, who say any money returned from TARP investments should be devoted exclusively to deficit reduction.

Treasury singled out banks that got bailout money as particularly strong performers in terms of producing dividends and repaying the funds they received.

Total bank investments of $245 billion in FY2009 (the U.S. tax year that ended September 30) that were initially projected to cost $76 billion are now projected to bring a profit of $19 billion, the official said.

(Reporting by Glenn Somerville; Editing by Kim Coghill.)

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