Lots of Government departments around the world are using public cloud infrastructure. Each juridstiction has slightly different circumstances, but in general there has been a move to adopt the cloud to take advantage of the elasticity, the speed to deployment and the economies of scale that the public cloud provides.
Some governments are setting up their own data centres to provide this across their departments, but many are taking advantage of the existing cloud infrastructure.
There’s been lots of work done on security and my colleague, Rocky Heckman wrote a couple of excellent pieces: http://www.lalaninja.com.au/2012/04/11/its-my-data-not-yours/ and http://www.lalaninja.com.au/2012/05/21/cloud-as-security-boundary/