It might seem an odd time to be trying it on, but a drive to rehabilitate Margaret Thatcher is now in full flow. A couple of years back, true believers were beside themselves at the collapse of their heroine's reputation. The Tory London mayor, Boris Johnson, complained that Thatcher's name had become a "boo-word", a "shorthand for selfishness and me-firstism". Her former PR guru Maurice Saatchi fretted that "her principles of capitalism are under question".

In opposition, David Cameron tried to distance himself from her poisonous "nasty party" legacy. But just as he and George Osborne embark on even deeper cuts and more far-reaching privatisation of public services than Thatcher herself managed, Meryl Streep's The Iron Lady is about to come to the rescue of the 1980s prime minister's reputation.

As the Hollywood actor's startling Thatcher recreation looks down from every other bus, commentators have insisted that the film is "not political". True, it doesn't explicitly take sides in the most conflagrationary decade in postwar British politics. It is made clear that Thatcher's policies were controversial and strongly opposed. But as director Phyllida Lloyd points out: "The whole story is told from her point of view."

People are shown to be out to get her – but not quite why. We see the angry faces of protesters and striking miners from inside her car, not the devastated communities they come from. By focusing on her dementia, it invites sympathy for a human being struggling with the trials of old age. Remarkably, a woman who vehemently rejected feminism is celebrated as a feminist icon, and a politician who waged naked class war is portrayed battling against class prejudice.

Lloyd herself is unashamed about the film's thrust: this is "the story of a great leader who is both tremendous and flawed". Naturally, some of Thatcher's supporters and family members have balked at the depiction of her illness.

But her authorised biographer, the high Tory Charles Moore, has no doubts about the The Iron Lady's effective political message. The Oscar-bound movie is, he declares, a "most powerful piece of propaganda for conservatism". And for many people under 40, their view of Thatcher and what she represents will be formed by this film.

Meanwhile, last week's release of 1981 cabinet papers has given another impetus to Thatcher revisionism. The revelation that she authorised a secret back-channel to the IRA during the hunger strikes and opposed Treasury attempts to deny Liverpool a paltry cash injection after the Toxteth riots has been hailed as evidence of the pragmatism of a leader known for unswerving implacability.

But most shocking are the secret preparations now being made to give Thatcher a state funeral. In the 20th century only one former prime minister, Winston Churchill, was given such a ceremonial send-off. Churchill had his own share of political enemies, of course, from the south Wales valleys to India. But his role as war leader when Britain was threatened with Nazi invasion meant he was accepted as a national figure at his death. Thatcher, who cloaked herself in the political spoils of a vicious colonial war in the South Atlantic, has no such status, and is the most divisive British politician of our time.

Gordon Brown absurdly floated a state funeral in a fruitless attempt to appease the Daily Mail. But the coalition would be even more foolish if it were to press ahead with what is currently planned. A state funeral for Thatcher would not be regarded as any kind of national occasion by millions of people, but as a partisan Conservative event and an affront to large parts of the country.

Not only in former mining communities and industrial areas laid waste by her government, but across Britain Thatcher is still hated for the damage she inflicted – and for her political legacy of rampant inequality and greed, privatisation and social breakdown. Now protests are taking the form of satirical e-petitions for the funeral to be privatised: if it goes ahead, there are likely to be protests and demonstrations.

This is a politician, after all, who never won the votes of more than a third of the electorate; destroyed communities; created mass unemployment; deindustrialised Britain; redistributed from poor to rich; and, by her deregulation of the City, laid the basis for the crisis that has engulfed us 25 years later.

Thatcher was a prime minister who denounced Nelson Mandela as a terrorist, defended the Chilean fascist dictator Augusto Pinochet, ratcheted up the cold war, and unleashed militarised police on trade unionists and black communities alike. She was Britain's first woman prime minister, but her policies hit women hardest, like Cameron's today.

A common British establishment view – and the implicit position of The Iron Lady – is that while Thatcher took harsh measures and "went too far", it was necessary medicine to restore the sick economy of the 1970s to healthy growth.

It did nothing of the sort. Average growth in the Thatcherite 80s, at 2.4%, was exactly the same as in the sick 70s – and considerably lower than during the corporatist 60s. Her government's savage deflation destroyed a fifth of Britain's industrial base in two years, hollowed out manufacturing, and delivered a "productivity miracle" that never was, and we're living with the consequences today.

What she did succeed in doing was to restore class privilege, boosting profitability while slashing employees' share of national income from 65% to 53% through her assault on unions. Britain faced a structural crisis in the 1970s, but there were multiple routes out of it. Thatcher imposed a neoliberal model now seen to have failed across the world.

It's hardly surprising that some might want to put a benign gloss on Thatcher's record when another Tory-led government is forcing through Thatcher-like policies – and riots, mounting unemployment and swingeing benefits cuts echo her years in power. The rehabilitation isn't so much about then as now, which is one reason it can't go unchallenged. Thatcher wasn't a "great leader". She was the most socially destructive prime minister of modern times.

Twitter: @SeumasMilne