Contracting out is the latest fetish for cash-strapped governments looking for a quick and easy way to attack the public sector for problems they didn't cause.
Yes, that's extremist. But, really, the pro-contracting-out line is just as extreme, and just as implausible. Contracting out might make sense, but it also might not. The modern right is looking for a simple solution to a complex problem, namely how to keep the welfare state up and running after decades of failure to maintain it. Rather than being told honestly that we face a difficult problem and hard choices, contracting out is served up as the panacea.
Part of it, of course, is just a general ideological attack on unions. Which is quite stupid, for a number of reasons. For one, unions are one of those groups that freedom of association protects -- governments can't really stop people from forming unions. (The legal ins-and-outs here may contradict me; on the other hand, if memory serves, the members of the RCMP are currently arguing in court, with some success, that they should have a right to form a union rather than an "association" if they want to.)
For two, contracting out doesn't prevent unions from existing. Public transit in York Region is at least partially contracted out, but is still unionized. Green For Life, which recently won a contract for part of Toronto's garbage service, is also unionized -- the CAW, in fact.
For three, public servants already give up a tremendous amount in order to do their jobs. Yes, yes, "public servants are overpaid!". Except they're not, at least not across the board. A dirty little secret of public transit in Toronto is that TTC and GO Transit workers are underpaid relative to the sector. It's only when you compare the public sector generally to the private sector generally that one can show the former are paid more (and even then, not that much more). Which is such an obviously unfair comparison that only an ideologue would make it.
For four, it breaks down the legal consensus which was established at the beginning of the last century. Unions agreed not to strike without notice (amongst other things), and employers agreed to (essentially) not be completely dickish all the time. There is lots to criticize about that consensus; however, when one side -- the employer side -- starts breaking it down, it's only a matter of time before the other side does the same. And I don't particularly want to go back to the days of, say, the Winnipeg General Strike. These sorts of conflict may have been romanticized by some, but they were, in reality, acts of revolutionary civil war. Which may be necessary, but is never desirable.
It's argued by moderates that contracting out can save money. That's possible, certainly, although it's worth noting that saving money isn't the only goal of government. Governments also need to provide public services at an adequate level. Toronto's transit, for example, has been underdeveloped for decades.
Contracting out can't save money, though, if the process by which a service is contracted out is done poorly. Toronto City Council has successfully pulled this off, with the aforementioned contracting out of garbage collection. Standardly, if cost is a concern, an RFP (Request For Proposals) will include a clause stating that the successful bidder will be the lowest reasonable bid. What I've read from councillors is that Toronto left out the word "reasonable", forcing them to take the lowest bid, from GFL. This bid was so much lower than the the next bid that almost no one believes they can do it; and GFL in Hamilton is already, two or three years into the contract, costing the city more than public workers.
Furthermore, there are such things as "public goods", for which a moral case can be made for keeping them not-for-profit and in public hands. Transit is one of them; for-profit transit often leaves areas underserved. Roads are similar; everyone has an interest in having sufficient -- and sufficiently good -- roads for the transport of people and goods, not just the people who can pay for them. Garbage collection is probably not; although diversion from landfill serves public interests, there's no pressing reason I can see for keeping it in public hands. Unless, of course, it costs more to have it done privately.