While I agree that there would be considerable benefit from this, I think that there's a whole mess of tinfoil hat issues here. Don't get me wrong, I fully believe that my government is spying on me (not specifically me, but in general). Giving them all the hardware means no more negotiating with service providers (at any level).
No more sneaking around what is or isn't okay. "This is my hardware, and to protect my hardware, I have to install this additional monitoring." There's the whole "If you aren't doing anything wrong..." argument, but let's not assume that giving the government the "means of distribution" is going to be all sunshine and puppy dogs.
Don't get me wrong, I'm not happy that service providers can do whatever they want, but at least then the competition drives them to all be the best (well, we're assuming that "best" and "most profitable" are related). The government has no such goal. It's possible this would even backfire completely and the government would let it languish - they've got dial-up, so our job is done, etc.