The Secretary of State for Scotland, Michael Forsyth, warned that the differential between spending north and south of the border - amounting to more than pounds 890 extra for every man, woman and child in Scotland - could be slashed from central Government spending. But George Robertson, Labour's spokesman on Scotland, told The Independent: "The Scottish people do not recognise that they are being subsidised, and see no signs of it about them.
"In England, people think that if the Scots are being that lavishly subsidised, why did Mrs Thatcher do nothing about it?"
After a day of disarray and confusion in Cabinet ranks, with the Secretary of State for Health, Stephen Dorrell, twice appearing to contradict the government line on Labour's devolution plans, the Prime Minister's office said there was no disagreement between ministers.
Repudiating a suggestion that a future Conservative government would abolish the Scottish parliament - a threat reportedly made by Mr Dorrell in an interview with the Scotsman - Mr Forsyth said: "A Scottish parliament is not just for Christmas; it's for life."
He also contradicted Mr Dorrell's statement, in a BBC radio interview yesterday, that there would have to be changes to any Scottish parliament that was set up by Labour.
Mr Forsyth said a parliament would be irrevocable, adding: "Once Humpty Dumpty falls off the wall, he will not be put back together again no matter how many of the king's horses and the king's men turn up...
"It would grow into a creature which might do enormous damage in Scotland, but we would have to live with the consequence of it." However, Mr Forsyth said: "If people in Scotland vote for a tax-raising parliament, and that is established, then the consequences that follow from that in terms of the rights of Scottish members of Parliament to vote at Westminster, the whole question of the funding of Scotland's parliament - at the moment, Scotland is about 30 per cent better funded per head than England - all of those issues will need to be resolved, and there will be very dramatic and adverse consequences for Scotland."
The Scottish Office last night provided figures showing that in the latest available year, identifiable spending by country was pounds 3,614 per head for England and pounds 4,505 in Scotland in 1994-95. If the 24.6 per cent differential was cut from the identifiable pounds 23,120m Scottish budget for 1994-95, it would have cost Scotland a penalty of about pounds 5.7bn.
A senior Labour source said Mr Forsyth was maintaining his tactic of trying "to frighten the children", while Mr Dorrell was adopting the softer line that action could be taken to mitigate the impact of a new parliament.
In a letter to the Prime Minister last night, Mr Robertson said: "There is now a deep and disturbing division within your Cabinet on this aspect of your Government's policy on devolution, with the Scottish Secretary apparently isolated. Can you say which side you support?"
Jim Wallace, leader of the Scottish Liberal Democrats, told BBC radio: "Stephen Dorrell has blundered out of his depth. He doesn't appreciate sensitivities in Scotland. If the objective of the Conservative and Unionist Party is to save the Union, I can't think of one act more calculated to break it up than to give people a Scottish parliament then try to take it away."
The Scottish National Party leader, Alex Salmond said Mr Dorrell's comments reflected "the breathtaking arrogance of the Conservative Party and reveals them in all their anti-Scottish glory".