That article finishes with "The arts and culture sector lost £152m this year from lottery funding redirected to meet the growing Olympics bill."
... which is the bit that goes to fund the "Grants for the Arts" scheme that you applied for, Andy D.
Although 'Grants for the Arts' is administered by the Arts Council the money doesn't actually come from their annual grant from the DCMS but from the National Lottery. It's that bit, not the (taxpayer-funded) directly voted 'Arts Budget' itself, which has had the 35% cut with some of the National Lottery money being diverted to the Olympics.
I had applied on behalf of a project I am involved in for some 'Grants for the Arts' funding too, with the same result as yourself
The DCMS 'Arts Budget' itself (including that part of it that goes to the Arts Council) did do surprisingly/comparatively well in the recent funding round compared with what had looked likely beforehand so in that sense it was 'good news'. There was a real fear that
it would be cut to fund the Olympics but that didn't happen, hence the relative relief.
What was made clear in the Chancellor's statement though (not that it was a surprise) was that the 'Cultural Ol
ympiad' stuff surrounding the Olympics would have to be funded out of the overall DCMS Arts Budget and that there wouldn't be any additional funding made available specifically for that. So, although the cost of the Ol
ympics themselves won't (for the period so far announced anyway) bite into the 'Arts Budget' proper, there will undoubtedly be some squeeze in the four years up to and including 2012 as money is diverted to cultural events surrounding the Olympics - whatever they may turn out to be. Jude Kelly would seem to be the person to ask about that.
[Thank you Mr S. Various Olmpics and Olmpiads now converted to Olympics and Olympiads. I await a knock on the door and torches in the face from the trademark holders.]