Michael Gove has brushed aside Britain's economic problems to propose the public donate a new royal yacht to the Queen as a mark of respect during this year's diamond jubilee celebrations, according to a confidential letter to fellow ministers.

In the letter, which has been sent to Jeremy Hunt, the culture secretary and minister overseeing the celebrations, and to the deputy prime minister, Nick Clegg, Gove at one point comes close to suggesting that Britain's dire economic climate means that a large-scale celebration is required to lift the country's spirits.

The education secretary writes: "In spite, and perhaps because of the austere times, the celebration should go beyond those of previous jubilees and mark the greater achievement that the diamond anniversary represents."

The Liberal Democrats privately expressed surprise at the proposal, which is likely to cost at least £60m, at a time of national austerity.

Meanwhile Tom Watson, the Labour party vice-chairman, said: "When school budgets are being slashed, parents will be wondering how Gove came even to suggest this idea."

Gove, an enthusiastic monarchist, writes in the letter: "I feel strongly that the diamond jubilee gives us a tremendous opportunity to recognise in a very fitting way the Queen's highly significant contribution to the life of the nation and the Commonwealth."

Commenting on draft celebration proposals prepared by Hunt, Gove expresses his reservations at a lack of ambition, saying: "I feel strongly more should be done to achieve a longer lasting legacy. Events such as proms and the party at the palace organised for the diamond jubilee, and street parties, although excellent, are transient. It would be appropriate to do something that will mark the significance of this occasion with fitting ceremony.

"My suggestion would be a gift from the nation to her majesty; thinking about David Willetts's excellent suggestion of a royal yacht, and something tangible to commemorate this momentous occasion." He adds: "The year ahead provides an enormous opportunity to showcase the very best of Britain."

Hinting at cabinet tensions over the way in which the culture department is focusing so heavily on the Olympics in the year of the jubilee, Gove says: "The diamond jubilee must not be overshadowed by the Olympic Games, but form an integral part of this great year for our country."

Some of Gove's extravagant language reveals the difficulties created for politicians by the coincidence of the jubilee and the Olympics, alongside forecasts that the UK economy will slip back into recession this year and see a further severe squeeze on living standards. Labour will be watching for any sign the national celebrations are used by the government to distract from the state of the economy.

Gove ends his letter by suggesting that if insufficient taxpayer funds are available a private donation could be sought, before making a naked departmental bid for every schoolchild or school to be given a gift as a permanent reminder of the event. Gove's office confirmed the authenticity of the letter but refused to comment.

The royal yacht Britannia was decommissioned by the Labour government in December 1997 and became a visitor attraction in Edinburgh. It was last seen listing after a leak during repairs over the New Year holiday.

Various efforts have been made to propose a new royal yacht, but have been rejected on the grounds of cost, estimated in 1997 at £60m. However, during the June celebrations a luxury cruiser boat, the Spirit of Chartwell, which is already being dressed up as a royal barge, will carry the Queen along the Thames as part of a pageant.