Australia's last great act of economic courage — Peter Costello

Peter Costello is the longest-serving Treasurer of Australia (1996–2007).

He led the most complex overhaul of Australia's tax system in the postwar era: introducing the Goods and Services Tax (GST) — a value-added consumption tax — while abolishing a range of indirect taxes (notably wholesale sales tax) and cutting income-tax rates.

I wanted to learn from Peter what it actually takes to achieve a reform at that scale — and why we haven’t managed anything like it since.

In this conversation, we discuss:

• GST implementation war stories;
• lessons on how to get big things done in government;
• why major reform became so much harder after 2000;
• why Peter would sometimes hide revenue estimates even from the prime minister; and
• the baby bonus (introduced in 2004), which led to an uptick in Australia's total fertility rate — making Australia one of the only western countries to increase (albeit temporarily) its TFR since the demographic transition began.

Video

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Transcript

JOSEPH WALKER: Today it’s my great honour to be speaking with Peter Costello. He is Australia’s longest serving treasurer, serving from 1996 to 2007.

My specific interest in speaking with Peter today is that he was the last person in Australia to achieve a major tax reform, namely the GST. For international listeners, that’s essentially like a VAT. That came into effect 25 years ago now.

Back when it was being debated, I was a very young kid and I remember hearing about it on the radio and thinking, “That’s not good that the government’s trying to make things more expensive.” Of course, at that point in my life I didn’t comprehend the importance of broadening the base and lowering the rate. I was more interested in Batman at that stage.

But not only was the GST our last major tax reform, it was arguably the most complex reform of the reform era. And, moreover, if you exclude the NDIS, we arguably haven’t achieved another major economic reform in this country since the GST.

So Peter, welcome to the podcast.

PETER COSTELLO: Great to be with you.

WALKER: I want to chat with you about your experience shepherding the GST through, and some lessons for getting shit done in government. I also want to talk about the baby bonus you introduced in 2004, because I’m very interested in understanding policy for increasing fertility, and new evidence has shown that that baby bonus was quite cost-effective.

But before we get into all that, by way of background, this is fast-forwarding now to when you’re in government: 1996, the Premiers’ Conference. The Commonwealth floated changes around the wholesale sales tax and exemptions, and then the states went feral and Howard pulled it back.

I’m curious what that experience taught you about how to sequence reform, how to build consensus for reform, the reform process. Is there anything interesting about that?

COSTELLO: Well, this was the lead-up to my first budget. We were desperately trying to put the Commonwealth on a path to balancing its budget.

What happened was that state governments were exempt from what was called wholesale sales tax. So they could buy cars tax-free. They would use them for a year and then they could sell them for more than they’d bought them for, because they didn’t pay any tax.

A private buyer who did have to pay tax could buy it from the government for less, and without tax, than they could buy it from a dealer in a normal commercial transaction. So it turned out [laughs] that we found out the state governments had basically gone into the car business.

They were buying huge fleets. They would use them for a year and they would sell them off and make a profit. It was an income generation scheme for state governments. They were essentially arbitraging their tax-free status into the used car business.

So, I’m desperately looking for money and I said, “Why are we allowing state governments to do this?” If you buy from a dealer, the dealer has paid the wholesale sales tax. If you buy from a state government, the state government hasn’t paid the wholesale sales tax. It’s taken a profit margin, arbitraging the tax-free status.

So anyway, with the agreement of the cabinet and everybody else, I announced that we would end this. Well, of course all hell broke loose. State premiers went into riot mode.

But I had gone through the due process. I had got cabinet agreement. Unfortunately for me, however, the state premiers got round to the prime minister and said, “You can’t go through with this. You’ve got to rein in your errant treasurer.” And he did a side deal with the state premiers.

We did eventually solve the whole problem another way — we got rid of the wholesale sales tax and replaced it with a GST. So I had the last laugh, as it were, but the premiers had the first laugh in that little episode.

WALKER: Was there anything specific you learned from that little episode about how to get reform done?

COSTELLO: You’ve got to make sure that you cover all the pressure points that could be used against you [laughs]. All the pressure points — even pressure points on your own side. You’ve got to make sure you cover off all the bases.

WALKER: Yeah, and that certainly feels relevant to the GST story, where you were meticulous about covering off those pressure points.

COSTELLO: Absolutely. I learnt from that that if you could neutralise the state governments and the state premiers, that would be very important. And of course I learnt that you had to lock in your colleagues and your prime minister, so that when the going got tough they couldn’t get through the back door.

I actually think the most clever part of the GST design — it has many elements — but the most clever part, which I as a result of that came to the conclusion we should do, was to give all the money to the state governments. All of the GST goes to the state governments.

So I could lock in these state premiers, many of whom were Labor and therefore opposed to GST. I would say to them, “You’ve got to understand this point: you’re going to get the money.” And they still do. Under the legislation, the state premiers, the states, get all of the GST revenue.

I remember when we were signing the agreement, Bob Carr was the premier of New South Wales at the time. We did the whole agreement and I produced the agreement – it’s time for everybody to sign this agreement. And I remember Carr saying in a very theatrical voice, “I am opposed to the GST, but New South Wales will be the first to sign up for its fair share.”

And he walked up to the table and signed the agreement — for something he was totally opposed to introducing. Why? Because he got the money, you see.

It was a much better deal for the states because all of the GST revenue goes to the states. And at 10% of goods and services, it grows.

This was the best deal they’d probably had since Federation. Before they got the GST, all they got was a grant from the Commonwealth, and the grant could be fixed, could be cut. It didn’t have to go up. The Commonwealth could do whatever it liked with those grants.

But by giving them this tax base — 10% of goods and services — they knew they’d have a fair idea as to how it was going to go and it would grow roughly in proportion to the economy. So I guess I learnt if you can neutralise state premiers and states — Australia’s a federation — you had a much better chance of getting on with the reform.

WALKER: That’s really interesting. Later I was going to ask you about the lock-in mechanism with the states, but it’s interesting to learn that it was that experience in the 1996 Premiers’ Conference that inspired that idea of yours.

COSTELLO: Yeah. If you want to do broad-based reform (I’m sure we’ll get to that in a moment), try and lock in as many centres of opposition in advance. 

Another thing I had learnt from the previous attempts to do broad-based indirect tax reform was that the social welfare sector had become a very strong opponent.

So I thought, we’ve got to try and lock these people in, in advance, and that led to increases in pensions. Sure, people on welfare benefits or government payments would have to pay more under a GST — I acknowledge that, I accept that.

But what I can do is increase their benefits to compensate them so their disposable income will be the same. That was another very important compensation mechanism, and it was done in advance so that we didn’t go to war with the social welfare sector.

How do we avoid a war with the states? How do we avoid a war with the social welfare sector? Churches had been great opponents. How do we avoid a war with the churches? So organised religion got a very good deal — they were exempt basically from the GST.

But just because you did all these things didn’t mean that they understood it. You had to go round and explain to people why this would protect their position whilst giving an overall benefit to society as a whole. So, yeah, I learnt some lessons.

If you can neutralise the opposition before it materialises, you’re in a much better position. Once it materialises, you’re in hand-to-hand combat from then on.

WALKER: Just briefly — and this feels like a naive question — did you have a physical list of the different stakeholders you needed to lock in?

COSTELLO: Oh yes. Hundreds.

WALKER: Lock-in lists [laughs].

COSTELLO: Hundreds. I remember going around and seeing archbishops and going around and seeing social welfare people, going around and seeing business groups, and of course negotiating with premiers and negotiating with state treasurers.

WALKER: It was a society-wide thing.

COSTELLO: Well, it was. Because the thing about a broad-based indirect tax — GST, goods and services tax (value-added tax sometimes, VAT) — is you’re taxing (and our objective was to tax) nearly every good and nearly every service, every day, every transaction.

This is much bigger than income tax or company tax or superannuation tax. As was famously said, when you get up in the morning and pull out your toothbrush, there’s a GST on the toothbrush and there’s a GST on the toothpaste. You go down and turn on your toaster, and there’s the GST on the electricity and there was the GST on your bread, because we wanted to include food. And then you hop on the train and there’s a GST on the ticket. You go into the workplace and there’s a GST on your coffee and there’s a GST on your pen, there’s a GST on your computer.

And this is what our opponents would say — and it was true, by the way. So if you are introducing a broad-based consumption tax — a GST, a value-added tax — the dimension of it is enormous. This affected billions of prices in the economy. Billions.

So it was capable of an enormous scare campaign. And, by the way, our opponents gave us an enormous scare campaign. Don’t worry about that.

So, in advance, I was basically trying to neutralise as many centres of opposition as possible.

WALKER: Okay, I want to take a step back. We’ll come back to lessons of the GST experience later, but I want to go through almost chronologically and draw out some of the war stories from you.

First, in August ’97 you stood up a taskforce in Treasury under Ken Henry. They worked in a separate building outside Treasury, it was very secretive — they had a safe room, special passes to get in, unauthorised members weren’t allowed in — and they began work designing the GST and modelling its economic impacts. That lasted a whole 12 months to August ’98, when you finally announced the proposal: A New Tax System.

Concretely, how did your daily routine change between 13 August ’97 and 13 August ’98? What did an average day look like for you?

COSTELLO: Well, the scare campaign started immediately, right?

WALKER: In ’97?

COSTELLO: Absolutely. This was not new ground for Australia. You’ve got to remember that Australia had been through many GST debates. Keating, as treasurer, hadn’t proposed a value-added tax but a broad-based indirect tax.

WALKER: Yeah, a retail tax.

COSTELLO: Yeah, so-called Option C. And that didn’t fly.

Then the Coalition, which I was part of under John Hewson, in 1993 proposed a GST. This time Keating — from being a proponent — became an opponent. He ran an enormous scare campaign and defeated the Coalition on the issue in 1993.

So Australia was fully attuned to this issue and to scare campaigns. In fact, Ken Henry had helped Keating defeat the GST in 1993, so I thought, right, for your penance, you’re going to help me introduce it. So I put him in charge of this taskforce.

To come back to your question, this started the day we announced we were going down this track. The scare campaign started. All the lines were there. They’d been well and truly primed from previous election campaigns.

So basically, at this point we’re working feverishly and I’m trying to quell the horses. “Don’t worry, we’ve got great plans [laughs], you’re going to see it all.” And of course our opponents, in order to get political advantage, had started a scare campaign already: “It’s going to murder you, it’s going to throw Australia into recession, you’re not going to be able to afford it. The poor are going to starve, the homeless are going to go homeless.”

So, basically, I would say for those 12 months we were in this full-on debate — scare campaign — even though we didn’t have a policy. But everybody knew where it was going.

What didn’t they know? They didn’t know the rate — which we came in at 10%, but you could have figured that out. They didn’t know the lock-in mechanism — that was a real surprise. That was an original, that. They didn’t know the compensation — what compensation would there be in welfare benefits? They didn’t know the trade-off in income-tax reductions that we would get.

They didn’t know what other indirect taxes we would abolish, although you could have worked out we were going to get rid of wholesale sales tax and a few other indirect taxes. But the bare bones — that this would be on as broad a base as possible — were pretty well known. And that was enough for the scare campaign.

WALKER: But what did your average day look like? As a fly on the wall, I’m kind of curious, for that 12 months.

COSTELLO: Get up early in the morning, go on talkback radio with all the hosts, do some morning television, probably go into Question Time where you’d be peppered with questions, do a debate in the Parliament, come out, do the evening radio.

In those days we used to have night-time television programs — Lateline, these sorts of programs — go on that, speak to the print journalists who were putting copy to bed for the next morning, go to bed for a few hours and get up and do it again the next day.

WALKER: Rinse and repeat. At the end of that period, you presented the GST to cabinet in a PowerPoint presentation. And I read in The Costello Memoirs that this was the first time that PowerPoint was used in the cabinet [laughs].

COSTELLO: Yeah, it’s funny [laughs]. PowerPoint was the most modern thing, you know? I’m not really a tech guy, but I had some people who said, “Can we put these graphs up?” And they brought this PowerPoint to me — there were graphs, colours — “This is the rate and this is how it’s going to apply, and these are the income-tax changes and these are the social welfare changes.”

Ultimately, once we’d settled the policy, I went into the cabinet and said, “Right, I’m going to present the policy.” I came in with the PowerPoints — the first time PowerPoint had ever been used in the cabinet in Australia — and I think I went for, I don’t know, seven or eight hours or so, explaining it. And it was obvious they didn’t have a clue what I was talking about.

They were asking questions and it was going on and on and on. Finally, after about seven or eight hours, we called it quits and I said, “Right, we’re all on the same page here, we’ve all got this,” and I remember walking out of the cabinet room with one of my colleagues and I said, “How do you think it went?” He said, “Gee, I like the colours in those graphs.” [laughs]

WALKER: How important do you think that tool of PowerPoint itself was to gaining cabinet’s approval?

COSTELLO: I think it was very important, because what we could do is we sort of built a model of the income-tax system.

What we could show is, if you move the threshold to this amount, you could save tax at the various thresholds by that amount. And we also had another thing which would show winners and losers — you’d have so many winners, so many losers. If you moved a rate between these thresholds, the distribution of tax cuts would be as follows, and another winners-and-losers.

So we could basically play around. I’d never seen anything like this before — just play around with all sorts of thresholds, all sorts of rates, distributional analysis, winners and losers. So it was really good. It can all be done now, but you couldn’t have done any of that without PowerPoint.

If somebody said, “If you cut the 30% rate to 28%, what would happen?” I could do a distributional analysis, and you could explain to people why you couldn’t do that, but why you could do this.

So it couldn’t have been done — it just could not have been done — without that.

WALKER: Oh, that’s interesting. On this point about technology, would the GST have been possible without PRISMOD and that technical capability?

COSTELLO: Well, this is what Ken and his team were doing. You get rid of a wholesale sales tax, right? So there was a tax at the wholesale level, and that had rates of zero, 10, 20, 30 — different goods, different rates. Get rid of all of that and you put 10% on final consumption. Right. Now here’s the question. What impact will that have on inflation? 

Because we know it’ll push prices up, because that’s at the final consumption level. These are all at the wholesale level. But will it push it up by 1%, 5%, 10%? And that’s what the models were designed to try and work out.

What is going to be the overall price effect? Now, you say, “Why did you need to know the overall price effect?” Well, first of all, I needed to know because you had to put compensation in there. So if there’s a 3% price impact and I give a 3% increase in benefits, I can say nobody’s worse off.

But if it’s a 10% price impact and I’m only giving a 3% increase in benefits, right? You can’t. And then for people who are in the workforce, you’ve got to know what the price effect’s going to be so you can figure out your income-tax cuts. So again, they’re going to be in front.

So that was where the macroeconomic model was very, very important — to try and work out the key price impact.

WALKER: So would the GST have been possible without that? Very difficult?

COSTELLO: No, no. I don’t think we could have done that either. We could come out with a price impact. Now, of course, a model’s only as good as a model, right?

WALKER: It’s not reality.

COSTELLO: Well, one of the things that sort of caught us in the middle of all of this was oil prices went up. And so we’re doing all this modelling on the assumption of constant oil prices. Oil prices go up, right? So petrol goes up. 

So people said, “You promised us petrol would only go up this amount. It’s gone up that amount.” Try as I may, I’d say it’s got nothing to do with the GST — it’s the underlying oil price. Well, that wasn’t acceptable to the media, as you can imagine. We got into a bit of trouble.

Then in your model you’ve got assumptions about the exchange rate, for example. The exchange rate’s got a life of its own independent of GST. So all of that’s going on.

So your model basically just produces an outcome, all other things being equal. The trouble is all other things aren’t equal.

WALKER: [laughs] So just to give our audience some context on the time constraints here: you obviously wanted the GST legislated by mid-’99 to give business a year to prepare before it came into effect on 1 July 2000. And that date was important because it was before the Sydney Olympics — we’d have a lot of foreign tourists spending here and they were already used to VATs in their home countries. Also, it would give a year to bed the tax down for Australians before the next federal election due in 2001.

Under those time constraints, do you think there was a plausible path to getting basic food included?

COSTELLO: Well, our policy was to include food, right? And we won the election on the policy of extending the GST to food.

WALKER: Sure, but once Brian Harradine voted against it—

COSTELLO: So we go into the Parliament, right? We say, “This is our policy.” Get it through the House of Representatives. It goes into the Senate. The Senate, by the way, set up six or seven select committees — the longest debate, almost, I think the second-longest debate in Australian history.

The opposition did everything it could to defeat this legislation in the Senate. And we needed one more vote to get food in. And the key guy was Senator Brian Harradine. I thought he was on the team right up until the time he went to vote, and he said, “I cannot.” So, at that point, food comes out.

That wasn’t the plan. If food had been in, it would have been easier to implement. It wouldn’t have been harder.

WALKER: My question was: at that point, after Harradine votes it down and then you’re forced to negotiate with the Democrats, was there a plausible path to getting food included, or no chance?

COSTELLO: Well, the Democrats wouldn’t allow food to be covered by the GST. The legislation just wouldn’t have gone through the Senate. We wouldn’t have had anything at that point. I fought to try and persuade the Democrats that they should include food.

WALKER: In your negotiations with the Democrats, did you and Howard explicitly agree with each other to play a good-cop bad-cop routine?

COSTELLO: I don’t know that we explicitly agreed, but it was pretty obvious that I’d live with this whole thing and I wanted the GST on everything. I was doing my best to keep as much in as possible.

The Democrats were doing their best to get as much out of it as possible. And, in the end, I think Howard was more amenable to compromise. We had to compromise — I knew we had to compromise.

That was obvious. It was just a question of how big the compromise was going to be. I was going for the smallest compromise possible.

WALKER: So it wasn’t a conscious negotiating tactic — it just sort of emerged organically?

COSTELLO: Well, yeah, I think that’s right. It was pretty obvious who was fighting for a small compromise in there.

And, of course, the Democrats used that. They sort of blamed me. It wasn’t a problem. If they took out their objections on me, it gave us an opportunity to do compromises elsewhere.

WALKER: When it came to implementing the GST, if you think about all of the practical problems raised by that: three billion price tags flipping at midnight on 30 June 2000, hoarding and buyer strikes, the threat of margin creep, etc. Of all those different practical problems, which one turned out in reality to be the trickiest?

COSTELLO: The practical problems were enormous. Now, the first thing is every business had to register for an Australian Business Number. That was the first thing. 

We thought a million businesses would register. After a few weeks, we got two million registrations — and rapidly going north. Where are all these businesses coming from?

WALKER: So at least twice as many businesses in Australia as you thought?

COSTELLO: Oh, more than twice. So that’s our first problem. Who are all these? Why don’t we know about them? Where are they?

WALKER: Most of these are mum-and-dad type businesses? 

COSTELLO: Oh yeah. The big companies, we knew all about. But these are mum-and-dad businesses we’d never heard of before, just coming out of the woodwork. So that was the first problem.

The second problem is all these businesses, including all these mum-and-dad businesses, have to remit the GST. They’ve got no experience of this. There’s no form, there’s no precedent.

So now we’re running training schools all through Australia on how to remit GST.

Then we establish help lines, so businesses can ring in and ask questions in call centres. That was great, but the problem is the people on the help lines didn’t know either. They didn’t have any more idea as to how this is to be done.

So it’s this huge registration task, this huge educational task, this training task. The passing of the legislation was hard, but this is just the beginning of the whole thing. So that’s why we wanted a year to bed all this down.

And then — and this is what I didn’t appreciate until pretty late in the piece — the two big supermarket chains here in Australia came to me and said, “You realise the GST comes into effect at midnight on 30 June? So there’ll be one price up till midnight, and there’ll be another price from 12:01. Do you realise we will have to change the price of three billion items — three billion — between 11:59 and 12:01?”

I thought, “Oo, that’s a problem. What are we going to do here?”

This is the dimension that you’re [dealing with].

WALKER: In that situation, isn’t that kind of just their problem? What kind of help were they expecting to get from you?

COSTELLO: Well, I think barcoding was coming in, but not everything was barcoded — point one. Point two: we’d assured people that we’d stop businesses from price-taking, using the tax changes to basically fleece the customer. So I had to have a pretty good answer to that sort of thing.

And, because the atmosphere was so febrile, people were saying, “What’s going to happen? What’s going to…” — sort of like Y2K — “What’s going to happen?” at midnight on 1 July.

So there were enormous technical and practical problems. And it was complicated by the fact that as part of the compromise with the Australian Democrats, we had to take food out. So you go to a supermarket: here’s a prepared bagged salad which might have GST, and there’s a fresh salad that doesn’t have GST. What’s the price differential going to be?

So the simplest way of doing a value-added tax is just put it on everything, right? You don’t have these demarcation, classification-type issues.

But we were unable to do that. So now we’re getting into this complexity, which I tried to avoid.

And our opponents are saying, “Ha, ha, ha, ha,” you know? A fresh chicken’s not taxed; cooked chicken is. How do you tell the difference between a fresh chicken and a cooked chicken? What temperature does it have to go to to be cooked? This is one of the questions.

WALKER: This was Simon Crean, right?

COSTELLO: Stick a thermometer into the chook and decide whether it’s taxed or not. It was a fair point, but, you know.

So in the end, as we were leading up to it — and there were no tax rulings, because we’d never done this before — there were no tax rulings. So I just said to the Tax Office at one point, “Bring up your 50 hardest issues, and I’ll give you a ruling in my office.”

So they came in. They said, “What do you want to do with this?” I said, “We’ll do that.”

WALKER: So as the responsible minister, you had the right to issue those rulings?

COSTELLO: Well, there was no precedent. And I’d drawn the policy — I might as well do the ruling. 

I remember a guy from KPMG said to me, “Look, the accounting firms would discuss this — they’d agonise over this for months, you know, trying to figure out a ruling.” I said, “We don’t have months, right? I’m going to do it in my office today.”

WALKER: It’s interesting, when I was reading about some of the history around this reform in preparation for our chat today, that story of you calling in the ATO Commissioner and issuing the indicative rulings yourself. That story, and then also, I think maybe this is late ’98, but correct me — when you set up Phil Gaetjens, your then chief of staff, in a sort of war room. He went offline, and his job in this separate unit in your office was just to fight the attacks on the GST. 

It struck me as a bit analogous to a startup where you don’t have a playbook, you’re using intuition, you can be quite creative, and you’re just making decisions without precedent. There’s not really a question here, but it’s interesting.

COSTELLO: You might as well do it, because who else is going to do it, you know? The tax commissioner doesn’t know. I’ve written the policy, I might as well do it. That was basically where we were.

Some of them probably had to get refined over the years, but I reckon I got about 95% of them right.

WALKER: It’s quite a creative act, politics. You’re doing things without a playbook or precedent. You realise you can do stuff within the bounds of the rules, and so you do it.

COSTELLO: Particularly if you’re in virgin territory, right? You can make the rules. We’d never had a GST. Nobody had any experience. We didn’t have any rulings. The courts hadn’t yet interpreted any of the legislation.

We had to administer it somehow, so who was going to do the rulings? Well, I’ll do it myself.

WALKER: [laughs] So, of all the practical problems, which one turned out to be the hardest?

COSTELLO: The hardest in the end, I think, was… We’re getting there, we’re getting there, we’re getting there. The first quarter went very well. But then I think business basically said, “Well, we’ve got through the first quarter, we’ve survived. Do we have to do this every quarter?” We started getting resistance on the second quarterly return. That was hard.

The other thing that was hard that people don’t realise is the interplay between GST and excise was unbelievably complicated. Take alcohol: you had to reduce excise so that by the time you put the 10% on, it came back to where it was.

You might say, “It’s not that hard.” The trouble is you had low-alcohol excise, medium-alcohol excise, heavy excise, 10%. Then you had packaged beer and fresh beer — different prices because there was a service component in fresh beer poured in a pub. And then, of course, you had wine, and then you had spirits.

All of these variables had to be interplayed to produce a particular outcome. It was the same with petrol: there was a petrol excise and a 10% GST. You had to amend the petrol excise so that when the GST goes back on, you move the price by the requisite amount. 

But whilst that’s going on, oil prices are moving. The exchange rate’s moving. So your carefully constructed calculation, which was right for the tax change, wasn’t right for the exchange rate.

You’ve got a million variables going on, political opponents down your throat, the press breathing fire against you, and an election in a year’s time. I just don’t think I thought about anything else for two or three years.

WALKER: One other story. When the tax finally comes into effect on 1 July 2000, I think you quite effectively leveraged the then head of the ACCC, Allan Fels. Can you tell me about that and the role he played?

COSTELLO: People said, “You change the tax system — get rid of wholesale tax, put on a GST — businesses are going to price-take. They’re going to rip us off. What’s to stop us being ripped off by businesses?” We’ll get the ACCC to price monitor. If they found anybody, under cover of the tax, increasing their margins, it would come down on them like a ton of bricks.

So Allan Fels was the head of the ACCC at the time. By the way, he loved media. He just loved media. He was out there every day giving expositions on what he was going to do to this business and that business.

WALKER: He’s like a war correspondent or something.

COSTELLO: Oh boy, yeah — the scene of the action. I’m sitting in my office and he’s ringing in during the day: “We found a coffee shop in Sydney that did this, and I rang them up and fixed them,” and “We found a bike shop down in Victoria.”

It’s like a war room. “Well, good on you, Allan. Keep going. Get up on the media.” He didn’t need any encouragement to get up on the media, I can tell you that. [laughs]

WALKER: Were there any other individuals like that who turned out to be unexpectedly very useful?

COSTELLO: He was very good; he was doing what we’d asked him to do.

WALKER: Were there any other individuals who turned out to be unexpectedly useful?

COSTELLO: On the implementation — well, that was hard. There were people who certainly helped with the arguments. As I said, I think we neutralised the state governments. The welfare sector never supported us, but it didn’t go for us in the way it could have. That was good from my point of view.

I think business was mostly supportive, because business gets all of its GST back. It was good from a business point of view. You pass it on to the consumer and they get tax back on all the inputs, so they came out well in front.

But you get opposition in unexpected places as well.

The only thing I’d say about all this is: remember, we got rid of wholesale sales tax, got rid of about five state taxes, introduced the GST, cut income tax, changed all of the benefits, and gave the revenues to the state governments, which changed Commonwealth–state financial relations. There’ll never be anything as big as that again.

And I wouldn’t want anyone else to have to go through that.

Here’s the point that always intrigues me. The GST has been in place now for 25 years — 1 July 2000. Do you know, in 25 years, the rate has not changed? And the base is practically unaltered.

It will be the most enduring part of the Australian taxation system now. In those 25 years, income-tax rates have changed, thresholds have changed, the coverage of income has changed, company tax has changed, superannuation tax changes, every year.

But the GST has become a very permanent cornerstone of the Australian taxation system. It’s now raising $100 billion a year. That’s not bad.

If you’d said to me 25 years ago this rate and this base would be unaltered in 25 years time, I would have thought you had two heads.

I think that’s an achievement. It has been the most certain part of the Australian taxation system for a quarter of a century. From time to time, people say, “We should change the base, we should change the rate,” whatever. But it’s been fixed and it’s been certain. I actually think the key to that whole thing was giving the revenue to the states.

See, the Commonwealth doesn’t want to increase the rate because the money goes to the states. It’s a lock. It’s been a very successful lock — much more successful than I thought it would ever be.

This addressed vertical fiscal imbalance — a much better deal than they’d ever had before. Up until then, they used to just get a grant, and the Commonwealth could cut it or increase it by 1%. They never knew what was going to happen; they had no certainty.

With this, they got a revenue base which was a growth revenue, where they could get projections, where they had some certainty, and it was theirs.

So it’s the only meaningful thing that’s addressed vertical fiscal imbalance, probably since the Second World War. But you can’t stop subsequent governments coming around and playing with the formula, as in fact happened, which I think has undermined its credibility.

WALKER: Right, with the WA deal. 

So, the agreement with the states isn’t legally binding, so a future Commonwealth government could always raise the GST if it wanted to?

COSTELLO: Well, it is legally binding, but the Commonwealth could legislate itself out of that agreement, if you know what I mean.

WALKER: Without needing to get the states’ consent?

COSTELLO: Yeah, exactly. It’s legally binding by act of the Commonwealth Parliament. If the Commonwealth Parliament were to change that act, it could undo the legally binding. But without a Commonwealth undoing that act, it is legally binding.

WALKER: Okay, one final object-level question on the GST and then I want to talk about some general lessons for reform. True or false: you have a gold dental crown inscribed with the letters “GST”? [laughs]

COSTELLO: True.

WALKER: [laughs] Do you still have it?

COSTELLO: Yeah. Up here. Inside the crown…

So, during this, I had a lot of dental trouble. I had to get a crown on my tooth. When the dentist came to put the crown on, he looked at it and started laughing. I said, “What are you laughing at?” He said, “My technician’s got a sense of humour.” “What do you mean?” “Well, the technician who made this crown has inscribed the letters “GST” into the gold crown on your tooth.”

And then the dentist looks at me and says, “The good news is, if you’re ever killed in an aircraft accident or something, we’ll be able to identify you very quickly.”

WALKER: [laughs] That’s great. 

COSTELLO: Unless there’s someone else out there who has GST on their crown.

WALKER: That would be, in their case at least, an odd decision. [laughs]

Before we go on to the general lessons, I have one completely unrelated question. I’m just interested in how government works.

I was chatting with someone the other week and I learned that when it came to the budgets — and the important context here is the early years of the mining boom, revenues flowing into the government coffers — someone told me about the “hunting licence letter”, and how, in order to keep spending under control, you wouldn’t even tell the prime minister about revenue until the very last minute. 

I found it interesting that even the prime minister wouldn’t know those numbers until the eleventh hour. Can you talk about that?

COSTELLO: I look at it as two phases. There’s a first phase: Australia was in the doldrums and mining was a very unfashionable industry, right up until — I did my first budget in ’96 — right up until 2004.

In 2004, the China boom starts taking off and we’re starting to get upside on revenues. I wanted to run surplus budgets and pay off debt, and I was concerned that if it was known that revenue was booming, my colleagues would spend it.

WALKER: Including the prime minister? [laughs]

COSTELLO: My colleagues. Basically, I was holding back the revenue estimate. Anyway, after a while, he figured this out and demanded the revenues much earlier in the piece. So I held back a little more than I had last year.

The expectation was, he’s only holding back 1%. Now he’s holding back 2%.

So we could run surplus budgets, and I think at the end we got the surplus up to about 2% of GDP — unheard of.

But the pressure in government is always to spend money. You don’t have to encourage a minister to spend money — that just comes with the turf. That’s ingrained. What you’ve got to do is try and restrain their expenditures.

They’ll keep on spending until all the money’s gone, and they’ll spend after all the money’s gone because you can borrow the difference. I felt I was one out against all these spenders in government.

WALKER: It’s interesting, the dynamic even between a treasurer and prime minister in that regard. 

COSTELLO: Sure, sure.

WALKER: Okay. Let’s talk about some lessons. How much of the attraction of the GST for you was simply that it was an insanely ambitious reform and would put you in the pantheon of great reformers?

COSTELLO: Well, it had been tried before. Keating — it wasn’t the same, it wasn’t as well designed as the GST — he had a go in ’85 and failed. Hewson and the Coalition in ’93 had failed.

My view was this had to be done in Australia, and we’d never get it out of our system until it was done. It just had to be done.

Even if I’d said, “Look, I’m against it,” it would have kept coming back and coming back. It’s got to be done. We all know it’s got to be done. It’s going to be very politically costly to do it, but we’ll never get peace until we do.

The big economic issue in all of this was: if we can increase the revenues from indirect tax, we can decrease the revenue from income tax. So it’s what’s called a tax-mix switch.

You take an increasing amount out of consumption — out of spending — so you can take less out of earning — income. That was the big macro point. There was a switch. Not as big as it would have been if we’d included food as well, but there was a switch. We didn’t say it like that, but that was the big economic point in all of this.

WALKER: It’s interesting that the GST was the Howard–Costello government’s most significant economic reform, and yet it happened in your second term less than halfway through the life of the government. After the dust had settled on the GST, was there a conversation internally about other reforms of that scale?

COSTELLO: You’ll never get anything of that scale. It just can’t be done. That was a tax-mix switch, a federal–state switch. It was an indirect tax on three billion prices. There was nothing more to do of that dimension.

But we did do other things. After that, we did company tax reform. We cut the company tax rate and changed a whole lot of things on company tax.

But nothing to do of that dimension anymore. That affected indirect tax, personal income tax, welfare, Commonwealth–state — the whole thing. Even if you picked up a pencil tomorrow, you couldn’t do anything as big as that.

WALKER: People often date the so-called reform era as beginning in 1983 with the Hawke–Keating government, finishing in 2000 with the introduction of the GST. Between when you got into government and when you left, did you notice that the environment had gotten generally less conducive to getting big things done? 

Not necessarily that you got less done by the end, just that it had gotten harder over your time in government. Did you notice any shifts?

COSTELLO: I think my experience in government was that, as you go on in government, you get worn down. Bit by bit, you get worn down. Seldom do you have the reforming zeal in a fourth term that you had in your first term. That was my experience.

We were still doing stuff and I was still doing stuff — the Future Fund, for example, 2004, is very important to Australia’s future. We tried to do labour-market reform in 2006–07.

But you get worn down, you get more tired, your opponents get a fix on you. You’ve expended enormous political capital doing this. Bit by bit, you get worn down.

That’s why I always say, if you want to do stuff, you’ve got to go for it in your first term, because it doesn’t get any easier after that.

WALKER: So Albo and Chalmers have missed the boat to get anything big done? [laughs]

COSTELLO: Well, I don’t know what they want to do. Obviously they want to put up the tax burden and increase spending. They would probably say to you, “That’s reform.” I don’t regard it as reform. But they would probably say that’s reform.

It all depends what you define as reform, actually.

WALKER: It’s striking that if you compare that period from 1983 to 2000 with the period from 2001 to today, there are many more major economic reforms in the first period than in the second. In the second, you could maybe really only count one — the NDIS. Now, obviously, it’s subjective how you define major economic reforms.

COSTELLO: I wouldn’t regard that as an economic reform. 

WALKER: Okay, sure. Well, okay.

COSTELLO: That’s a spending program.

WALKER: So maybe you’d say there have been zero in the second period, but that just starkens the conclusion. If we take a step back, what do you think is the biggest thing that’s changed — either in the political system or the world at large after the 1990s — that’s made it so much more difficult to get major reforms done?

COSTELLO: See, it all turns on what you mean by reform, right? Now, here’s what I mean by economic reform. I think economic reform is things that make a country more productive.

WALKER: I’m very happy with that definition. So, stuff that increases productivity by a meaningful percentage—

COSTELLO: —and leads to higher living standards, right? That’s what I would describe as reform.

WALKER: Yep, that’s good.

COSTELLO: Now, I agree with you: there hasn’t been much in recent years. But if you want to say spending programs are reform, well, we’ve had lots of reform, because we’ve had lots of big spending programs. 

We had a big spending program after 2008. The pink batts and the school halls. And we had a spending program for COVID. But that’s not what I’m talking about when I talk about reform. 

So, if you’re saying we seem to have walked away from enhancing productivity, or focusing on enhancing productivity, I would agree with that.

I think partly it’s because the political class have lost interest in it. That’s a big part of it.

WALKER: But why have they lost interest?

COSTELLO: Because it’s hard. And they’ve found another way of getting votes, and that’s borrowing money.

WALKER: So we’ve become a victim of our own prosperity?

COSTELLO: In a way, yes. We got rid of debt. We became debt-free — 2004, debt-free. A lot of work; we became debt-free. People look at that balance sheet and say, “Wow, there’s a lot of room in there for borrowing.”

So from now on, we can fund a lot of our promises and programs by borrowing. And basically that’s what we’ve done. We’ve run down the balance sheet. It’s sort of like: if you’ve paid off your mortgage and you’re sitting there with a house that’s worth something, you could either buy a better house, or you could say, “Yeah, I could run up the mortgage again and live off the borrowings.” And that’s easier. That’s basically what we’ve been doing.

We went from having no net debt to having over half a trillion of net debt. This allows the political class to make promises and keep the whole thing running quite well because they’re running down the balance sheet. And they can still say — because we came from such a strong position — “Our balance sheet is still better than most other countries.” 

It’s not because they’ve managed it well; it’s because they inherited a very strong position. I think that’s what’s been going on over the last, particularly the last 15 years.

WALKER: So it’s just too tempting.

COSTELLO: It’s easier. 

WALKER: It’s easier. And there’s no wolf at the door to motivate –

COSTELLO: And there’s no wolf at the door yet. So everything’s gone on quite well. My view is, at some point, there will be a wolf at the door — maybe not next year, but the next decade — and then we’ll be more exposed. But it’s working quite well at the moment.

WALKER: So that’s what you think is the biggest thing that’s changed?

COSTELLO: Yeah. In a funny kind of way, I think we were victims of our own success. Having got the balance sheet so strong, it just invited people to run it back down again.

WALKER: Has there been a time in Australian history where we’ve had a decade of prosperity and managed to resist the temptation to get complacent? Or is that just the natural order of things?

COSTELLO: Probably not. You look back through times of prosperity in Australia — they generally ended badly.

WALKER: Like the post-war era ended badly. Ended with the ‘70s.

COSTELLO: Well, you know, the Korean wool boom and all of that kind of thing — it ended in the inflation of the 1970s. And then we sort of got our act together again. And now I think we’re running things down again.

In many respects, managing prosperity is harder than managing adversity.

WALKER: There’s that famous line that The Economist wrote about Australia: we’re great managers of adversity and terrible managers of prosperity.

COSTELLO: Yeah, I think there’s something in that. It’s very hard to say to the public, “You’ve got to keep working hard on these things year after year.” The public says after a while, “Oh, gee—”

WALKER: “Are you sure?” [laughs]

COSTELLO: “Let’s make some whoopee.” So you make some whoopee, and it generally ends badly, and the public says, “Okay, now you can fix things up.” But every now and then they like to make some whoopee to get some benefit.

WALKER: So the compensation for the GST exceeded what it brought in in revenue by a full 1% of GDP. It feels like that particular reform ushered in this new norm in which there couldn’t be any losers from reform. Firstly, do you agree with that claim? And secondly, on balance, do you think that norm has been a good thing or a bad thing?

COSTELLO: The nature of politics is that your opponents will exploit any losers. My view is that in order to get big reform through, you may have to, in the short term, cushion people. But a big reform over the longer term will produce benefits well in excess of anything that had to be done for the adjustment.

And of course, when the GST came in, it wasn’t a fully fledged tax like it now is. It wasn’t raising $100 billion. So it was important to give compensation to get it through. But once you add it in, it just keeps on growing in proportion to the economy.

Politics being what it is — there’s easy stuff and there’s really hard stuff. I would say tax reform’s the hardest, particularly tax reform that affects every person every day. That’s just of a dimension all itself. That’s why it can be done once every 30 or 40 years or something.

There are other things that are more minor in impact, where you can have winners and losers because they’re minor in impact. But I wouldn’t draw any particular lessons from the GST. That's a one-off. That’s sui generis. You’re never going to see that again. Other, more limited things will not be governed by the same rules, I don’t think.

WALKER: I imagine since you’ve left politics that various political leaders have sought you out for advice on how to go about getting major reforms done. I’m sure it was always clever advice, but was there any particular piece of advice that you thought was especially clever?

COSTELLO: That I gave them?

WALKER: Yeah, after you left politics.

COSTELLO: I remember once speaking to the Russian minister. He was trying to broaden his indirect tax base. And I said, “Is it true, as I read, that tax collectors in Russia have Kalashnikov rifles?” And he said, “Yes, but only for self-defence.”

WALKER: [laughs] That’s great.

COSTELLO: Good advice — only for self-defence.

WALKER: Any general advice on reforming that you’ve given?

COSTELLO: The most important thing is to actually know what you mean by reform, and know what you want to do. I hear a lot of people say, “We should reform the tax system.”

Okay — what part of the tax system? “Oh, I don’t know. I think everything should be on the table,” they say. Okay, put everything on the table. Now tell me what you’re going to take off.

You’re not doing tax reform until you announce rates and thresholds and coverage and trade-offs and economic benefit and everything else. This is tax reform on the cheap: “I’m in favour of reform; I just can’t tell you what it is.”

That’s not tax reform. So the most important thing is: if you want to go down the reform path, tell me what you mean by reform. What outcomes do you expect from it? Why are you doing it? How are you going to explain it? Until you’ve thought about those things, you’re not even in the ballpark. It’s just wish fulfilment up until then.

WALKER: Reminds me a little bit of people who want to be a startup founder but without having any idea of what particular problem they want to solve.

COSTELLO: That’s right. When you’re a startup founder: “Oh yeah, could be in this.” “That’s good. Or that?” “Could be in that too. As well as that.”

“I’m involved in a startup. Don’t ask me what it does. Don’t ask me how it makes money. I’m just involved in a startup.”

WALKER: [laughs] What do you think is the most non-obvious skill that a successful productivity-enhancing reformer needs?

COSTELLO: I think the most important thing is the ability to communicate the benefits.

WALKER: But what’s the most non-obvious thing? I know that’s putting you on the spot a little bit.

COSTELLO: Well, I only deal in obvious things.

WALKER: [laughs] Okay. What do you mean by being a good communicator?

COSTELLO: If the public hears “productivity”, they think, “Oh, that’s bad.” I remember once I said, “Because we’re living longer, we can’t afford to retire at 65 anymore.”

My opponents went right down my throat and they said: “Costello wants you to work ’til you drop.” That’s pretty powerful — people hearing I was going to make them work until they dropped, until they died at work. That wasn’t what I was talking about at all. But your opponents are entitled to misrepresent you and make political capital out of it. For a while it was, “Work ’til you drop, Treasurer Peter Costello said today,” and the media were in the whole thing.

So when people hear “productivity”, they think it just means working harder, working longer, getting less. They don’t like that idea. The most important thing is to be able to communicate. What will they get from productivity? Ultimately they will get higher wages and better living standards. That’s why we’re doing all this — not to satisfy some equation somewhere, but to give you a better life. The most important thing is to be able to communicate that.

WALKER: Okay, to finish with some questions on the baby bonus. We’ll spend much less time on this, but there are some things I’m quite curious to learn from you. Last week, the total fertility rate number for 2024 came out. The TFR has now dropped even further — it’s down at 1.48.

Take me back to the internal conversations in government in the early 2000s. The first Intergenerational Report comes out in 2002; it makes salient a lot of these concerns about an ageing population and the fiscal and tax consequences of that. 

What was the main rationale for the baby bonus? And I suppose there was also the early incarnation of the first child tax refund announced in the 2002 budget, then superseded by the baby bonus in 2004. Was the main rationale raising fertility? Supporting families?

COSTELLO: No. It wasn’t, you see. When the baby bonus first came in, it was actually a tax concession.

WALKER: This is the first child tax refund? This is in 2002, right?

COSTELLO: Yeah. Basically, the idea was we’re trying to help new families. If you went out of the workforce, you lost the tax-free threshold you would have got for the years you were at home raising a child. So we’d give you a tax break. This is how it all started off.

You’d get two and a half thousand. But you had to apply for it, subject to income tests and all the rest of it. And the take-up was very weak.

I was just thinking to myself: we’ve got that baby bonus, which is basically a tax break. We used to have a maternity allowance. We used to have an immunisation allowance. Different qualifications, different income tests, different ways of claiming it. We’ve got to cut through all of this.

So I said: I’ll get rid of all the income tests and all of the different rates. We’ll just have one thing — universal — on the birth of a child. So I added up all the benefits that then existed and I think it was $3,000. Lump sum, $3,000 — ka-boom. I didn’t even call it the baby bonus; it was called a maternity payment when it came in. It was simple, universal.

I remember — this is how politics gets made — I’m in the pre-budget press conference, and a journalist said to me, “But I’ve already had my kids. I’m going to be locked out of this.” I said, “How many have you got?” The journalist said, “Two.” I said, “Well, why don’t you have one for the country?”

Right? That’s how it happened — in the press conference. It’s not in the budget speech; it’s not in the budget. I said in a press conference, “Have one for the country.” I got into a lot of trouble because someone on my staff said, “You shouldn’t encourage journalists to breed,” you know?

That’s how it happened. Then it got into the press — “have one for the country” — and the British press picked it up. One of the papers over there — might’ve been The Daily Mail — covered the budget under the headline, I’ll never forget this: “Australian Treasurer Says Bonk Down Under.”

That was the headline. The British press, then it gets pushed back to Australia, pushed back to Britain. That’s how it all happened.

So it wasn’t actually at all a measure to increase fertility. It was a rationalisation of all these other programs into one lump sum, which would be universal.

WALKER: Interesting.

COSTELLO: Alongside that, we had published the Intergenerational Report a couple of years before and alerted Australia, I think for the first time, to the danger of the ageing of the population and the declining fertility rate. 

So I was saying we had to arrest the declining fertility rate, and I was also saying we’d simplified the maternity payment. The two got conflated together, and it became a little humorous anecdote of Australian political life.

Now, the interesting thing is, much to my amazement, the fertility rate did kick up. So it wasn’t done to kick the fertility rate up, but I think it had an effect. The most important thing was not the bonus itself. The most important thing was we talked about the need to arrest the decline of the fertility rate.

I think it was talking about the issue — how the declining fertility rate would affect us badly, how it would be good for society if we could arrest it. The baby bonus just fitted in with that narrative. But I think it was the narrative that actually had an effect.

I think you could introduce a baby bonus tomorrow and it wouldn’t have any effect at all. Because unless somebody’s talking about fertility—about the effect it will have on society—it wouldn’t go anywhere. It’d just be another benefit.

I think it was the tilling of the ground with the Intergenerational Report, the talking about it, and then this other thing comes along and the two get conflated and off we go.

WALKER: Firstly, that’s very interesting to learn that influencing the fertility rate wasn’t the main original rationale. On the importance of the narrative, there’s been some excellent new research by e61 on the baby bonus and (this wasn’t the main finding but) one of the things I noticed in their research was that the biggest percentage increase was for third births which is consistent with the narrative being important, because that’s obviously the one—

COSTELLO: Absolutely. That’s the “one for the country.”

WALKER: —that’s the one for the country. [laughs]

COSTELLO: Right? So if you’re thinking about arresting the fertility rate—well, if a family has two, replacement level’s 2.1. That doesn’t get us back to replacement. The only way is if we had, on average, three. 

And obviously people who know how to have kids and enjoy kids and have two—they’re probably the most receptive to having three. And when you actually look at what happened, it was people having the third one—or sometimes fourth, fifth. People would come up to me in the street: “I’ve had one for the country.” “Fantastic, good on you.” 

But they weren’t doing it to get a baby bonus. Nobody in their right mind would have a child—which costs you, I don’t know, a million bucks or more over its lifetime—to get a $3,000 bonus. I don’t think that was the point at all. 

The message was: it’s good for society, it’s good for you, don’t feel bad about being out of the workforce and having kids. You’re actually doing a good thing for you, and it helps us all. I think it was the message that made the difference.

WALKER: The e61 research pleasantly surprised me in a couple of ways. Let me tell you what they were and then why I was generally excited by it. Firstly, it showed that the baby bonus created “counterfactual babies” rather than just bringing births forward—

COSTELLO: [laughs] It’s a funny expression—counterfactual babies.

WALKER: —not the most romantic. 

COSTELLO: I don’t know what a counterfactual baby is, but go on. [laughs]

WALKER: Births that wouldn’t have happened anyway. 

A couple of reasons we can be fairly confident about that: one is that birth spacing didn’t change, and secondly there was a big jump in births exactly nine months after the announcement. 

So births increased by about 6.5%. 

The second big update for me, it was much more cost-effective than I expected. The cost of an additional baby, using the $3,000 benefit, was about $50,000 in 2004 terms—about $86,000 in 2025 terms. 

The reason I’m excited about this is because global fertility decline is a big, mysterious problem. We don’t quite know what’s driving it. It’s even affecting countries like India now. It doesn’t seem to have a simple explanation about the opportunity cost of having kids increasing. It seems like there are these broader cultural forces at play.

There’s this question of, can we use policy to influence the fertility rate? We need lots of experiments around the world to help us answer that question, and [Australia’s baby bonus] seems to be an interesting and important experiment.

To some people that might seem like an expensive price tag for a “counterfactual baby” but I don’t think it is—and at least we know what it might cost to save civilisation. [laughs] 

So I was quite excited to see that. I don’t know if you have any reactions to the research.

COSTELLO: We first of all arrest the decline in fertility in 2004, then we marginally tick it up. This is very unusual. I’ve heard people come up with all sorts of explanations as to why that happened. Then, when the government changed, Labor dismantled that whole program and you see it go down again.

Something happened to the TFR between 2004 and 2008. You can come up with a lot of explanations. I’ve never really heard a satisfactory answer that doesn’t involve the baby bonus and the Intergenerational Report.

I think somehow it’s related to the Intergenerational Report and the baby bonus—not totally, but somehow. There’s no explanation that can exclude them.

Then we’re thrown out of government. Labor comes in, starts dismantling the baby bonus, and replaces it with paid parental leave. Paid parental leave was much more expensive than the baby bonus ever was. Paid parental leave comes in and the fertility rate starts declining again.

I’m not criticising paid parental leave. But the one thing we can conclude is that paid parental leave doesn’t increase the fertility rate. We can see on the graphs. Paid parental leave comes in and the fertility rate starts declining.

That’s not to say we shouldn’t have paid parental leave; I think we should. But the one thing we can conclude is that paid parental leave doesn’t affect fertility. You can leave the question open whether the baby bonus and the Intergenerational Report did. 

And this is a point I make. You want to look at the marginal cost of additional children and you say, well there’s $50,000. I don’t think it’s the right way of looking at it and certainly the baby bonus was never designed to actually do that.

But what then is the marginal cost of paid parental leave if it produces no additional children? It must be infinity—it’s the cost over zero. 

Now, I don’t think that’s a reason to say paid parental leave is no good. Paid parental leave is not to produce more babies, it’s to help people who are having babies. And that’s exactly the way I would explain the baby bonus. It wasn’t there to produce another child here or another child there. It was to amalgamate all of these payments and do it in a universal lump sum way.

I think it may well have turned the fertility rate, but it was going to happen regardless of that. It was a simplification of these benefits. The fact that it might have had that result, that’s good. Pleased about that. But you wouldn’t measure its value on the number of additional kids alone. That’s my point here.

WALKER: Although it wasn’t the original rationale, did you start thinking about how it could be used as a tool to influence the fertility rate? And did you ever look into how feasible it would be to “buy” your way back above a replacement rate?

COSTELLO: Because something undoubtedly happened between 2004 and 2008, people around the world have noticed this. This is one of the few Western countries that, for a moment in time, turned the decline of the fertility rate — probably the only one. 

I have a lot of people from overseas come to see me about this, to talk about the experience. And it’s noticed. It’s so rare. It’s so unusual, it’s noticed around the world. A lot of countries are trying to experiment. 

I say to visiting ministers and visiting heads of government, I don’t think you could introduce a baby bonus tomorrow and see your fertility rate tick up. In fact, if you reintroduced it in Australia tomorrow, I don’t think anything would happen. That’s not the key. 

The key is to talk about the issue and to talk about the importance of children and families and the contribution they make—and to value them. A bonus might just be a monetary way of saying we value children. But it’s the message that we value children that’s important to people.

You can’t get away from that. If the attitude is, “A child spoils your life — interrupts your career and costs a million dollars; you’ve got to buy a new car because your car’s not big enough, build a bedroom because your house is not big enough, pay for childcare.” If the message is that a child’s a bit of a burden. And having children is hard, we all know that. 

But if the message is, “it’s a bit of a burden,” don’t be surprised if people have less of them. If the message becomes, “Actually, this is a good thing; it’s a vote of confidence in our future; it’s actually good for our society; it will help prevent the aging of the population,” then I think you might be in the business of arresting the decline. 

But it’s the message that counts — not the dollar sum. That’s the point I always make to these visiting people. We’ve got much more benefits for kids now than we did in my day — we’ve got paid parental leave; childcare benefits are much bigger than they were in my day — but the fertility rate is still declining, because it’s not really a monetary thing. It’s the message I think that’s important here.

WALKER: Which might imply that it’s the cultural causes that are more important here.

COSTELLO: I think that’s right.

WALKER: When I say culture, I mean it’s sort of perceived to be less “cool” to have kids or lots of kids.

COSTELLO: It’s a bit of a burden that gets in the way of your life.

The thing that always amazes me is, where the highest fertility rates are highest are generally in developing countries. It seems to be a fact of life that as societies become wealthier, they have less kids. 

So you can’t say it’s a monetary thing. It’s much more than that. It’s culture, it’s lifestyle—all of these things.

WALKER: You could say it’s an opportunity cost thing, but I think the fact that it’s coming down even in countries like India—if you take Uttar Pradesh, a province of about 200 million people, one of the poorest provinces in India, it’s coming down even in Uttar Pradesh. Which wouldn’t be consistent with the opportunity-cost story. So it’s a weird thing.

COSTELLO: Undoubtedly as societies become wealthier—and as India becomes wealthier—they have fewer children. That’s the conundrum. So it can’t just be about money. Then, someone will say, “That’s because as they become wealthier they learn about birth control.” 

People know about birth control in developing countries. It’s more a lifestyle thing. Some countries have high birth rates for religious reasons. But in developed societies the fertility rate just seems on an inexorable decline. 

We’re lucky in Australia: we’re still having more kids born than people dying, so we’ve still got some natural increase in population. But many countries don’t—the countries of Europe; look at Russia, Italy, Japan. There are more people dying than being born in these societies. 

These societies are starting to die on themselves. It’s a very bad inflection point for these countries. We’re not there yet, but if this fertility rate continues, around 1.5 or a bit below, we’ll be there in a decade or two. And that’s bad for a society, in my view. 

Now, some people might say, “Oh, it’s not bad, what does it matter if everyone’s old and more people are dying than being born?” Well, it’s a decaying society, in my view. Some people won’t see it that way, but I do.

WALKER: Last question on all this. Australia hasn’t had a population policy since the post-war era. In the post-war era, Calwell and Chifley set a target for a certain population by a certain date and they wanted 2% population growth per year: 1% from natural increase, 1% from net migration. 

I was having lunch on the weekend with the great demographer Peter McDonald and he was saying that, at least to his knowledge, no country in the world at this moment has a population policy and as far as he’s aware, that example of Australia in the post-war era is the only example he can think of of any country in history to have had a population policy.

Partly this is just because it’s so difficult to calibrate population. But obviously the benefit of being Australia is that you’re an island surrounded by very hazardous sea routes and you can control migration, calibrate migration, relatively well.

Do you think we should have a population policy?

COSTELLO: There are two elements to population: natural increase and immigration. I think we’ve just decided we’re not doing anything about natural increase—that’s declining and baked in now with these fertility rates, baked in for the next 20, 30, 40 years. 

So when you talk about a population policy, you’re actually talking about a migration policy. Should Australia have a migration policy? Yes, I think it should. 

We should have in our minds—and I think it should be announced—what the sustainable level of immigration is. At the moment it varies very widely; the government doesn’t seem to be able to control it. 

I think we should have it very clearly stated, so that everybody knows—this is what we think is the sustainable migration policy and that’s what we’re going to work towards. I would agree with that.

WALKER: But migration’s an input here. Do you think we have a target for the population as a whole?

COSTELLO: Migration’s the biggest input—it’s sort of more than three-quarters of the input here. 

WALKER: But should we be thinking about a percentage or a target for the Australian population as a whole, that we want it to hit?

COSTELLO: I think we should be thinking, what is a sustainable increase, and we should also be thinking to ourselves about what kind of migrants are going to be the best migrants for Australia. I think that’s another part of the whole thing.

You raised Curtin, Chifley and Arthur Calwell. They were operating a White Australia policy, by the way, and we wouldn’t operate a White Australia policy today. And we shouldn’t. 

But I personally believe the migration policy should be totally focused on skills. That’s where it should go. We should get much more serious about skilled immigration.

WALKER: Just to finish: I want to come back to something in our conversation about why the reform era ended, and the fact that it’s ended. 

As a kind of broad reflection on Australia’s deep political culture, it strikes me that implicit in this consternation about the reform era ending, is this quintessentially Australian attitude that government has a role to play, and should be playing a role.

You’re a fabulous representative of the “small-l” liberal tradition in Australia, but even you are worried about the fact that the reform era has ended. This is so far from an American-style libertarian view where that wouldn’t even be a concern.

There’s not really a question here, but it’s sort of an interesting reflection that this worry about the reform era ending seems to be a quintessentially Australian worry.

COSTELLO: I think it’s a mistake to try to draw lessons from the United States into Australia. The United States is one of a kind. It’s the biggest economy in the world by far. Whether policy is good or bad in America, it’s just an economy that rolls on. It trades with itself; it has huge momentum. 

Australia is different because we’re a mid-size country. If we want to be strong, we’ve got to have good government and good policy. America can be strong without it—and is. They can afford bad government in America. I don’t think we can afford bad government in Australia.

We might be able to afford it in the short term, but we won’t be able to sustain it in the longer term. That’s my message: we’ve got to work harder at these things. 

Just because the Americans are doing whatever they’re doing, don’t think we can escape. We’ve got to work a lot harder at this kind of stuff if we want to stay where we are as a mid-size nation, looking for a prosperous way of life with higher living standards.

We’ve been running down; but we won’t be able to do that forever. That’s my message.

WALKER: That’s a good message. Alright, this has been a lot of fun. Thanks so much, Peter.

COSTELLO: Thank you. Thank you very much.