The long parades of boarded-up terrace houses in the shadow of Liverpool football club's ground seem desolate and devoid of life.

Once earmarked for demolition, they are now in limbo as funding for the initiative will be withdrawn by the coalition government next month.

The 15-year programme to demolish unfit terrace houses and replace them with modern homes was at its halfway point when it was brought to a halt.

For Liverpool, it appears to be the first tangible sign of the coalition cuts biting – and the situation can only get worse. Over the next two years 1,500 council jobs will be axed as it tries to make £141m savings.

Last week the council leader, Joe Anderson, indignantly withdrew from David Cameron's "big society" in protest at the cuts. Hundreds of people marched through the city at the weekend to oppose the squeeze in public spending.

Roz Groves, chair of the Anfield and Breckfield community group, has been instrumental in navigating residents through the Housing Market Renewal Pathfinder, which the coalition brought to an end. "Now we've got a Labour council and a Conservative government," she says with exasperation. "There should be no difference in what happens – those promises were made. The coalition has condemned thousands of people to live in the most deprived areas. I can't see Cameron living round here."

Old satellite dishes cling to some of the houses and "Gas off" in red paint scars the brickwork. Street signs have been taken as keepsakes. A bulldozer noisily reduces a primary school's playground to rubble.

Groves says when teachers asked children in local schools to draw a house, they would often sketch them boarded up.

Richard Finch worries about the impact of the cuts on the city. He manages the Kirkby Unemployment Centre in nearby Knowsley. Demand for its services is soaring as budgets are cut.

He grew up in the 1980s in south Wales mining communities destroyed by the Conservative government. "This time round it is hitting whole communities," he says. "By the time those two clowns have finished with their plans there will be large parts of this country that will resemble a war zone. As the father of a small child, the potential impact is frightening." He says there is funding out there but it's minimal and not joined up.

The imminent loss of the North West Development Agency will have a huge impact on Liverpool and the north-west, he says, but little has been said about it.

The NWDA had been a major investor in the city. Since its inception in 1999 it has consistently met or exceeded all targets set by government and has created or safeguarded 220,000 jobs, created 23,000 new businesses and reclaimed 4,700 hectares (11,600 acres) of brownfield land and levered £3.2bn of private sector investment.

Finch adds that many of the new clients are middle-class losing full-time jobs, with mortgages and credit card bills to pay. They are like "rabbits in headlights".

One of his ancestors helped Nye Bevan draw up the plans for the NHS.

"He'd be spinning in his grave if he saw what was happening now."

A graph that plots indices of deprivation against the cuts shows Liverpool and Manchester right at the edge of the graph – hardest hit and with the highest levels of deprivation.

The deputy council leader, Paul Brant, says the government has hit deprived areas hardest. He says it's inequitable that Dorset has found its settlement increased.

In Liverpool – where almost 40% of the workforce is employed in the public sector – Building Schools for the Future has also gone, taking with it the planned renovation of 26 schools.

"We have thousands of boarded up properties and no money to renovate, demolish or rebuild them. No council has been hit harder than us in terms of the funding settlement. The loss of the development agency is a quadruple whammy."

Uniquely in Liverpool, which is not renowned for cross-party collaboration (remember Militant?) the political parties have agreed to work together to produce a budget this month in what is a "Blitz spirit".

Brant describes the situation as "worse than Thatcher". "This government is frontloading the cuts," he adds.

Another resident speaks of the city-wide gloom. "There is a lot of despair about what the government has done and there doesn't seem to have been much thought behind the strategy as it's been done so quickly," he says. He recalls the Thatcher years in Kirkby, where the Birds Eye factory was closed 22 years ago with the loss of 1,000 jobs. The prime minister visited Liverpool and chose to condemn the workers, which backfired spectacularly.

He says there is a sense of history repeating itself.