The GPL isn't virus-like, it's totally a virus. That's the way it was designed.
Now the LGPL, if it can be applied to non-libraries might be a good bet for gov't financed software.
It can, but what does it matter? You can distribute GPL'ed programs with other proprietary software. The GPL "infection" stops at whole program boundaries, it does not extend to a suite of other software.
Wrong, it is no different than proprietary software. If you release it with changes, the original author's license still applies. Some people can rework MS software, but they cannot use it as their own or sell it as their own. Same thing.
And when is MS going to give away their software to the goverment to change it and release it as public domain?