As a former government employee I can attest to the fact that ethics was never a prime concern at the ministry, just the appearance of ethics. Sure pens and paper clips disappeared at an alarming rate, but worse than that, the real theft was in respect to time. In the tax department, people worked about 1 1/2 to 2 hours a day and goofed off for the rest of the day. It was disgusting and I vowed never to work for the public sector again. Sorry, don't mean to offend any serious and honest government workers out there. My dad was one of the honest ones. This situation makes you guys look bad too. It's just so wrong!
Danielle, as for stealing at the work place, I'm thinking it's a culture that begins in cooking school. I was shocked when one of our teachers was asking the name of a cut of meat he had just sliced off and vacuum packed in front of the class. We were all struggling to find the correct name. He laughed and said: "it's called a perk". He doesn't seem to have a problem with it, and makes us understand that it's the norm in the industry and repeatedly tells us that he and his collegues did it regularly.
If you feel that reporting these people is the right way to go, then follow your conscience. Just be careful how you do it: because of this culture, you are the one who might seem like the bad guy. Think of your approach and the consequence of your actions. I would probably go to the person of authority and say "if someone was stealing from your inventory, would you want to know about it?" Use his or her reaction to determine how much you should talk.