I'm building two 4" scale Burrell SCC traction engines. My lathe is 6.5" centre height by 40" and will swing 19" in the gap; it has easily handled anything I've needed to machine for the engines so far. It would of course be possible to do without a mill, but it'd be really tedious. I have three milling machines; vertical, horizontal and CNC. You don't need a CNC mill, although it does make some operations easier, and allows you to do some things that can't be done on conventional machines, such as machining true bevel gears. Neither do you need a horizontal mill, although I use mine a lot for gear cutting and removing metal in a hurry, as it is more powerful and rigid than my vertical mill. I've got plenty of other toys too, but we won't mention those. 
So, in summary, you only need a lathe and ideally a vertical mill, to start with. My vertical mill has a swivel and tilt head, and I've used it precisely once. So it's not essential. Personally I'd go for an R8 taper in the mill rather than MT3. The R8 taper is much more widely used, and is sold by many commercial tool outlets, so there's a wide range of price/quality tradeoffs available. In general I don't swap tooling between lathe and mill, so I see no advantage in having a Morse taper in the mill spindle.
I'm not going to get involved in the new versus old, or Far East versus UK/USA debate. Everybody has their own opinion, and it's just that, an opinion.
One point that hasn't been raised is the drawings. You may be sadly disappointed if you expect the drawings to be accurate. I am redrawing my engines in 3D CAD, to correct errors in the drawings, make changes to allow for metric material where imperial isn't available, and to simplify where appropriate.
I'm also awkward in that I'm making all the parts that I can, including all the gears, rolling and welding my own wheels and making all my own wheel spokes. I'm also looking at making my own pressure gauges, and possibly injectors.
I have a build diary on 'TractionTalk' under the name of 'oly2brf5'.
Regards,
Andrew
PS: If you're ever in the Cambridge area, PM me and drop in.
Another PS: You can tell I'm awkward, because the first bits I made for my engine were some of the gears.
Edited By Andrew Johnston on 26/06/2013 23:19:38