This week in the Christian Science Monitor there's a series about government funded faith-based initiatives and how they appear to be prospering despite what had been some pretty big resistance on the part of faith communities to pursue and accept government money.
I think it's perfectly clear that lot's of good social change and service has come out of faith communities. If I'm not mistaken, many of the earliest social movements in the US were faith based. But the question as to whether the government should may be more a question of governance, rather than capacity.
The essential question: for whom is the faith-based group working and why is it being supported by the government? And of course, the faith-based group must ask whether they can abide by the government rules given their own "higher" allegiences. Taken from this angle, government grant support of faith-based work -- is this really the public supporting the public or the public supporting a higher power?