Thanks svejk. It seems the correct position is this:
" the designated campaign can spend up to £7 million on campaigning during the official referendum period - as opposed to £700,000 for other registered campaigns. They will receive a public grant of £600,000, can make Referendum broadcasts and will get a single free mail shot to every home in the UK." So, you are right that the actual grant is only £600000 but the additional free mailshot is surely worth close to £7 million, maybe more.
But I agree that what the government is doing now is on top of the funds available for the In and Out campaigns. Only time will tell whether the government is right to use public money in this way or whether there will be a backlash. At least Cameron was clear in the election manifesto that he was in favour of staying but would hold a referendum- no other major party offered such a vote- and Cameron's party won the election with that manifesto.