The development of mass transit (train lines) has a similar issue when comparing the United States to Western Europe, Korea, Japan, Taiwan, Singapore, or Hongkong. In the US, as much as possible is sub-contracted. In the others, a bit less, and there is more engineering expertise on the gov't payroll. There is a transit blogger who writes about this extensively... but his name eludes me. (Does anyone know it?)

Regarding contractors vs in-house software engineering talent, I have seen (from media) UK gov't (including NHS) has hired more and more talent to develop software in-house. No idea if UK folks think they are doing a good job, but it is a worthy experiment (versus all contractors).