I think the bigger issue is the cost of the hut itself... 2% isn't really all that much in the scheme of things. In general I'm all in favour of government supporting the arts; compared to the subsidies given to other industries arts funding is a drop in the ocean. I'd guess that there are better methods of distributing funding than setting aside an arbitrary amount from project budgets though.
I like walkinTas's suggestion; maybe something like a viewing platform constructed from recycled materials from the previous hut could've fulfilled the 'artwork' requirement while also helping to meet the hut's primary purpose and tying in with the history of the site...