That's an interesting song, both musically and lyrically. What strikes me most is the sadistic voice (known from other songs as well) and an almost dystopian atmosphere.
As with other Morrissey songs, you get some puzzle pieces (probably not even belonging to the same set) and then have to put them together somehow, and most of the time they will refuse to be equated 100% with any real-life stories. So, I know that some folks came up with some parallels to Chinese population policies, mostly their one-child-policy, for this song.
I think I just see it mostly as a fictional product, like the description of a dystopian society, with naive families on the one side and some self-righteous, sadistic folks on the other who are feeding on the oblivious families and their children, not just by taking their tax money but also eating their children. The idea of making use of human bodies is very common in dystopian literature and film, just think of "Soylent Green" or "Never Let Me Go" , for example.
The line "But do not underestimate us" sounds as if there is a perverted need of appreciation in those sadists in power nevertheless. They are not just satisfied with exploiting ordinary folks smilingly, but they want to see them in terror. And if Morrissey had written a story about this dystopian setting, this would have been the point where the action sets in, as this weakness in character of the exploiters would necessarily lead to resistance within the population.