I agree Hellion, and I've also found people tend to think Parish Councils are church organisations.
To answer the original question, I suspect that government wants to give local councils greater responsibility. I guess they won't get enough money to take care of their new responsibilities, but will get the power to raise taxes etc. If they have to raise taxes to pay for the things that central government now pays for, then they'll look bad instead.
Oh, and yes, I think Ruth Kelly and several other New Labour MPs do think we're that stupid. And sadly, I think for the most part, they're right, and the Parish Councils will get the blame.