Margaret Thatcher considered slashing Scotland's budget by £500 million in 1984, newly released Cabinet papers have revealed.

And the Tory government under her leadership actively manoeuvred to conceal the real level of cuts it imposed on the Scottish block grant, according to letters now made public under the 30-year rule.

Thatcher's chief policy adviser John Redwood argued in January 1984 that Scotland had an "over-provision" of £900m in its then annual block grant of £6 billion.

Mr Redwood claimed this was the result of an "over-generous" baseline set for the Barnett formula for public spending across the nations of Britain.

He proposed a reduction of £500m and the Treasury argued for a "needs assessment" to achieve the cuts.

In language reminiscent of a Yes Minister script, civil servant Andrew Turnbull - who was then Thatcher's private secretary - pointed out the "real political dangers" the Iron Lady saw for such a review.

"If it were to show that Scotland was under-provided for," Turnbull wrote, "the government would lose a major plank in its defence against Scottish Nationalism.

"If this study showed Scotland were over-provided for, it would be inevitable that the Treasury would seek to cut this back, which would create a major political issue in Scotland."

According to Turnbull, Thatcher held that "it would be better ... to trim Scottish programmes as and when opportunity arose rather than through a very conspicuous exercise."

Thatcher's Scottish Secretary George Younger agreed to a £30m cut in the annual block grant to be phased over a three-year period up to 1988.

However in November 1984 chief secretary to the Treasury Peter Rees, sought a further £36m cut in the Scottish budget for 1985-6.

Rees indicated to Younger that the block grant figure for that year in the public expenditure white paper would remain the same as the one already made public in the Autumn Statement of 1984, thus "minimising the risk that these adjustments will be 'visible'."

Younger responded in December 1984 that he was prepared to cut back "by whatever figure I judged could be guaranteed to remain invisible to my critics in these matters" - but wrote that the cuts already agreed to were "the most I could surrender without risk of detection."