There doesn't seem to be a Government wide policy on the licensing of images on Flickr. Some of the images posted seem to be from photo agencies and so that they aren't available under a free licence is understandable. For those images taken by departmental staff, the licence selected varies but most aren't an accepted free licence.
The compatible licence is based upon the most "free" licence that could be seen applied to images in the photostream. Not all photos are available under that licence.
Might be worth considering the implications, if any, of the adoption in some areas of Government of the Open Government Licence which allows Crown copyright material to be used under a licence compatible with CC-BY. Look at UK Government Licensing Framework.
Would the Cabinet Office be responsible for Government wide Flickr policy?