LABOUR is at war with Whitehall mandarins over plans to tear Exeter out of Devon.

The top civil servant charged with creating a unitary council in the city has washed his hands of the process, warning public money is being put needlessly at risk.

An explosive letter to Communities Secretary John Denham, seen by the WMN, says the plan would "impact adversely" on public finances.

And it claims ministers have given "no evidence" to justify their decision to ignore warnings that the sums did not add up. Peter Housden, permanent secretary at the Department for Communities and Local Government, formally refused to take the rap, warning the Government faces defeat if opponents take the matter to court, with big legal bills leading to cuts elsewhere in the department.

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But Mr Denham over-ruled his most senior civil servant, ordering him to plough ahead with the controversial shake-up. "It is my considered view that these decisions and the reasons for them should now properly be considered by Parliament," he said.

But the damning revelations cast further doubt on whether the super-council, providing all services in Exeter, will ever go ahead. Critics claim the Government is insisting Exeter goes it alone to create a Labour oasis in the rural county, bolstering support for Cabinet Minister Ben Bradshaw. It has been estimated the change could force council tax bills in the city up by £200 a year.

Until now, opposition has come largely from rival councils and Conservative politicians. But Mr Housden's blunt assessment of the likely failure of the policy exposes divisions at the heart of government and suggests Labour will go to any lengths to force the policy through.

In a sign of the farcical handling of the row, yesterday morning the Department for Communities and Local Government issued a statement denying there had been a "breakdown in relations" between Mr Housden and Mr Denham.

But last night the press office withdrew the claim, insisting only that it was "not unprecedented for permanent secretaries to seek directions".

Tory shadow communities secretary Caroline Spelman claimed Labour had been "caught red-handed fiddling with local government structures for petty, partisan advantage". She added: "This startling intervention by the Civil Service comprehensively demolishes the case for this expensive and disruptive upheaval."

The Government announced on Wednesday that it wanted unitary councils in both Exeter and Norwich, despite previously admitting they were not affordable. One of five golden rules – that the costs of changes must be paid back in savings within five years – was abandoned.

It came just 48 hours after Mr Housden sent his letter warning the minister not to go ahead with the Exeter and Norwich proposals, writing: "I am concerned that the approach you are currently proposing makes it difficult for me to meet the standards expected of me as Accounting Officer."

Insisting he would not take legal responsibility if public funds were lost, he added: "If you and the Minister for Local Government were to decide to proceed as you are currently proposing, I would be grateful for your written instruction to implement such a decision."

This absolves the Accounting Officer of the personal responsibility for decisions which breach financial propriety rules.

Mr Housden stressed his "specific responsibilities for the efficient, economic and effective use of resources" in his department and for "value for money, judged for the public sector as a whole" of minister's policies.

"I do have concerns, principally about their value for money and feasibility," he stated, adding that the plan would "impact adversely on the financial position of the public sector as compared with the alternative courses of action open to you" – including retaining the two-tier structure.

The Government's own figures suggest that, by 2014-15, Exeter and Norwich would still be £400,000 in the red, and would later achieve combined annual savings of just £6.6 million.

Ministers have pinned their hopes on the plan stimulating economic growth which would create more jobs. This would lead to rising tax revenues for councils and the Treasury and a cut in benefit payments for the unemployed.

"The evidence for such gains is mixed and representations that you have received provide no evidence to quantify such benefits," wrote Mr Housden.

Devon County Council has made clear it is likely to launch a legal challenge to the proposal – a move likely to be bolstered by the latest revelations. Mr Housden warned that the risk of the Exeter decision being "successfully challenged in judicial review proceedings is very high".

The threat of legal challenge "poses significant risks" that the new council would never come into force and the cost of defending the plans in court "could only exacerbate the worries I have described about value for public money". "It would also put pressure on departmental resources, altering priorities."

Devon County Council leader John Hart said: "Civil servants have blown the whistle on the devious, desperate and disreputable actions of the Government. The credibility of ministers is shot and the Government has been caught playing fast and loose with Parliament's already damaged reputation."