The citizens of Liverpool were told last week that their city's coffers were nearly empty. The possibility that the city's school and all local services might be shut down is the result of an impass between city and the national government. London, which provides financial aid to city councils, imposed new guidelines for its support in 1983. Liverpool's council chose not to obey the rules, declaring it a matter of principle: Central government should not interfere with local authority.
After London cut off aid to Liverpool, local politicians from other urban centers tried to persuade Liverpool's council to modify its opposition to government spending restraints.
But militants in a left-wing group that dominates the council argued that it was better to let the money run out and force London to intervene than to back away from a ``principled stand'' on their right to govern Liverpool themselves. Liverpool now faces a future in which essential services would falter and fail, schools would close, and 31,000 council employees would go unpaid. Derek Hatton, the city council's deputy leader and the driving force behind the campaign of defiance, spoke of the ``arrog ance of Thatcher's government.'' Prime Minister Margaret Thatcher herself showed absolutely no sign of bending.
Aside from the sheer drama of seeing the deadlock intensify, political observers have been struck by the problems it poses for Mrs. Thatcher's chief opponent, Labour Party leader Neil Kinnock.
Antagonistic to curbs on local authority spending, Mr. Kinnock believes they cause suffering to the poor and needy. But he also opposes the militants, who are widely seen as a radical group of Marxists who exploit their position within the Labour Party.
The militant side has been stressed by Mr. Hatton with great vigor, and Kinnock fears that many voters will decide that a Labour Party containing such views is unworthy of support. Kinnock, with limited room to maneuver, has worked hard behind the scenes to defuse the Liverpool crisis.
Thatcher, meanwhile, has shown a politician's readiness to let Kinnock's embarrassment over the division in his party appear as public as possible. The Conservative Party calculates that it can only gain from Hatton's hardline conduct of Liverpool's affairs.
In Liverpool, civic groups braced themselves for the anticipated ``crunch.'' Some council workers said they would work on without pay, but without income the council will not be able to keep its vehicles on the road or heat its buildings.
Liverpool has 80,000 school pupils in 250 schools, and many see education as the main victim of the crisis. But Hatton and his colleagues have said they do not regard education as a service that must be maintained by the council.
In an effort to ease the crisis trade union leaders in the city urged the council to accept a tax increase of 15 percent that would avoid insolvency for the time being. But this formula was rejected by militant leaders who said they still wanted to go to the brink in their battle with the Thatcher government.
In 1983 Britain's Conservative government determined that for local authorities to qualify for central government funds they must set taxes at levels approved by London. Local governments soon discovered that the new levels reduced income, thus entailing cuts in social services.
In Liverpool, with high unemployment and an aging population that depends on local help, the council chose not to comply with the new rules. This meant they could neither set a legal tax rate nor count on financial help from London.