it depends whether the user needs to login. if they just view and you are able to cache the modules (or whole pages in DNN 5.2.1 and later), you won't require much additional resources. Besides, there are a number of hosters, which provide you with a dedicated server for a reasonable price - IMHO for a governmental site with privacy and data protection requirements, this should be a preferred solution.

As a city government running DNN, we host our own web server.  This may not be an option for you, but we've found that internet access and services are so important we can't trust them to a host.  On the other hand, we have seriously looked at offloading some of our functions, including the web site, to a hosted service/virtual server/colocated server/etc.  Cost has been the deciding factor each time, but we would most likely use OrcsWeb as our provider.

After more than a decade of this, I've found that spikes rarely occur as much as we would think.  Hurricanes are the most intensive we've had, and it has never been an issue with our server and DNN.  We run dual T1 connections for our internet access.

On another note, let me know what city and I'll add it to my list of governemnt sites using DNN:

http://weaselfire.wordpress.com/government-sites-using-dotnetnuke/

Jeff