In recent years in UK politics, truth has often been stranger than fiction. Who would have thought one year ago that there would now be a coalition government between the Conservatives and the Lib Dems, one preaching the gospel of spending cuts while – you may not realise this – presiding over a further surge in public spending?

For the past three months we have heard little else but talk of cuts, cuts and more cuts. But despite all this rhetoric, you may be surprised to learn that money is still pouring out of the Treasury, such was the momentum of Labour's last spend.

When we saw the August 2010 figures for current spending they were an eye-popping 11 per cent higher than August 2009. If we look at the figures in the new Chancellor's Red Book, we see that this year current spending is scheduled to rise by £37bn or 6 per cent. Next year, he plans to increase it further to £651bn, a total increase of 8.5 per cent over the two years.

How did we come to be here? The previous government presided over boom-and-bust economics. Its independent central bank laid on boom in bank credit up to 2007, and bust in bank credit for the following year or more. Mr Brown laid on boom and boom in public spending, swelling the Treasury coffers with substantial state borrowing to top up the ample tax receipts from an economy growing well on the back of a borrowing binge.

During the last year of the Labour government, the Conservatives were right to warn that public spending and borrowing had to be reined in. The case was made much easier to sell in the general election as the Greek drama unfolded to show voters what can happen to a country which ignores the warning signs and thinks it can just carry on borrowing. The Lib Dems, who spent much of the election saying controlling public spending was not an urgent priority, were converted to the view that the UK's public finances were in a sufficiently rough state to warrant early and strong intervention. They saw the need to avoid a Greek- or Irish-style loss of confidence, higher interest rates, and enforced larger spending cuts.

As Conservatives meet for their conference they will be in good spirits, now that Gordon Brown has left Downing Street, and relieved that the work of recovery and rebuilding can begin. It has been a bruising three years, with the UK economy suffering a nasty credit-led inflation, then the worst slump since the 1930s, and then an unprecedented banking crisis. While many Conservative members wanted to win outright, all sensible ones recognise a coalition was the only option, given the electoral arithmetic given to us by the voters.

There will be less looking back to the election and to what might have been than the media might like. Lord Ashcroft has written his account of why we did not win, which is much more moderate and sensible if you trouble to read it than if you read the headlines that came from it.

Some believe if we had hammered Labour more we might have done better. I beg to differ. Some think if we had spent more time talking about immigration and Europe we would have done better. Again, I suspect it would have made little difference.

I was impressed during the election by the seriousness of many electors about the economic situation. They were ready for bad news and for realistic remedies. They knew the Labour game was over, but wanted to know more of the Conservative alternative. The electorate had not been too impressed in the first couple of years of the last Parliament, when Conservatives were cautious about economic policy. They warmed more when the Shadow Chancellor announced a big tax cut in 2007, and thought he was right to become more critical of Labour in its later years.

If we had warned more strenuously about the forthcoming disaster – as I tried to do in the Conservatives' economic policy report – and if we had said the state should act as lender of last resort but not a main shareholder of stressed banks, we would have had a better audience in 2010.

We could have said this: protect retail depositors, avoid collapse, but force the banks to sort themselves out by asset sales and spending cuts as the crisis develops. If we had, the solution would have been quicker, tougher and distinctive. Instead, we allowed Mr Brown to pose as the saviour of the world, and assisted with making the bankers the whipping boys for the crisis, when there were also grave policy errors made by the Chancellor and his regulators. Today there is still crucial work to do to reform UK banking so it serves small business and the public better.

None of the history matters much now. The future of this government will be settled by how well it tackles the huge economic problems it inherited. The biggest surprise so far is the rhetoric of cuts when the overall figures show a tight but not an unrealistic or unpleasant settlement.

The coalition needs to recognise that more than 12 million people in this country depend on the state for their livelihoods, either through public sector jobs or benefits. There is no need to scare them about cuts that need not happen. There are another 20 million in private sector employment who see themselves paying so many of the state's bills. There should be no need to frighten them with more taxes.

The key to success for the Government and for the country it leads is simple. If they can make the modest increases in public spending work, providing good quality public services for a realistic price without unpleasant cuts, they will win new friends. If they can reform the banks, cut taxes on enterprise and get the private sector economy moving faster, they will make their task easier.

The best and biggest spending cuts should come from getting people off benefit and into work. To do that they need to change the regulations on the banks, encourage more credit to business, and work away more quickly to make the UK a more competitive place.