Cheap? get a length of plastic tube to run the chain thru, it will drag thru that rather than the frame ,
Torch time..!
more realistically get a frame builder to change the dropout

they may need to make a new one cut from steel plate.

It will , one hopes include the needed location to put the torque transfer washer to make the rear wheel IG hub work..

its a short job for a well equipped machine shop,
but If you are trying to do it with hacksaws and a hand drill it definitely will take a long time ..

You may have hit a Cul de Sac ,
, different hub with a smaller cog may clear where the 25t on a Sturmey 8 speed won't.

a hub with more internal reduction gears can use a smaller external cog, S-A 8 speed has No reduction gears