By all means, this song reflects the philosophy that the show tossed at us ever-so frequently: is this life just a dream? As such, we can take this song as being from Spike's perspective, since this was how he viewed his existence during his years post-"death."
Blue, in this sense, represents heaven and thus, a blissful state of rest and peace. Hence, "Never seen a blue sky/Yeah, I can feel it reaching out/And moving closer/" - heaven, peace and rest, which he's never really had before this, is ever-so-slowly approaching him.
Look at it this way: take the beginning of the song to represent his lack of understanding of what life's about, and the middle bits to reveal that yes, he understands now and he doesn't want to leave it. He understands life is this wonderful, amazing gift of a thing, but now he's free of this neverending dream of his and is free in the blue (heaven). Now that this great epiphany of life has reached him, he is truly free - free of the dream. Thus, the ending of the song is acceptance of death, and the ascending to the blue.
Of course, you could simply ignore all of this blathering and simply enjoy the song - the opening with choir sounds (despite being in Yoko Kanno speak, sounding like the chant of "where's your messiah?"), reaching into the deep, rough vocals of Mai Yamane that ever-so-slowly builds up to the chorus in a brilliant crescendo, accented by the tolling of church bells to indicate the rising, uplifting (if not melancholy) tone of the song - this is brilliance in musical form. Kudos, Yoko Kanno. Kudos.