The Greens have accused the government of "gross malfeasance" over a loan to the Glamorgan Spring Bay for a dam and pipeline.
In Parliament, Treasurer Peter Gutwein rejected the suggestion of any wrongdoing from Greens Franklin MHA Rosalie Woodruff but said the council "had got itself into a spot of bother" over financing for the project.
"We will support them and have been engaged every step of the way and will continue to play our part," Mr Gutwein said.
Mayor Debbie Wisby says she is still awaiting a response from Tassal about whether the company will fund the $600,000 shortfall for the dam which would have supplied water to its East Coast operations.
Mr Gutwein said he spoke to Councillor Wisby on Monday night and the council's capacity to borrow was the same that any other Tasmanian council would have to go through.
"The process the council engaged in was exactly the same process; the same metrics and the same approval process was applied to this council as would be applied to any other council," he said.
"The council has itself in a challenging situation because the costings associated with the project have blown out. We will work with the council and with the community to ensure a suitable solution can be found."
Dr Woodruff said that in 2016 Mr Gutwein "signed a $4 million Tascorp loan to the Glamorgan Spring BayCouncil to construct the Prosser water pipeline".
"Now cost blowouts mean the council cannot afford to finish the job," she said.
"It cannot supply the water to Tassal, or anybody else, and will not be able to recover its costs."
The federal government-funded $2.33 million for stage one of the dam and pipeline project.
Councillor Wisby said the council was at 40 per cent of its borrowing capacity.
"We will not have borrowing capacity for many years as a consequence of borrowing this money," she said.
"It's not that we don't have it for two years, it's more like we don't have it for closer to 20 years."