The Joe Walker Podcast - Australia's last great act of economic courage — Peter Costello

Episode Date: November 2, 2025

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.   Episode sponsor: Vanta: helps businesses automate security and compliance needs. For a limited time, get one thousand dollars off Vanta at vanta.com/joe. Use the discount code "JOE". See omnystudio.com/listener for privacy information.

Today, it's my great honour to be speaking with Peter Costello. He is Australia's longest serving treasurer, serving from 1996 to 2007. And 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. Great to be with you. So 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 premier's conference. the Commonwealth floated changes around the wholesale sales tax and exemptions and then the states went feral, Howard pulled it back. I'm curious, what did that experience teach you about how to sequence reform, how to build consensus for reform, the reform process? I can know it, but is there anything interesting? This was the leader to my first budget, right? So, We're desperately trying to put the Commonwealth on a path to balancing its budget.

Now, 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. right? Because they didn't pay any tax. A private buyer who did have to pay tax could buy it from the government less without tax than they could buy it from a dealer, a normal commercial transaction. So it turned out 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 they would 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. And so, you know, I'm desperately looking for money. And I said, why are we allowing state governments to do this? You know, if you buy from a dealer, the dealer's 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. attracting the tax-free status.

So anyway, with the agreement of the cabinet and everybody else, you know, I announced that we would end this. Well, of course, we'll help break loose. State premiers went into riot mode. But, you know, I had gone through the due process. I got cabinet agreement. Unfortunately, for me, however, the state premiers got around 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. So we did eventually you see solve the whole problem. Another one is we got rid of the wholesale sales tax and we

replaced it with a GST. So I had the last laugh as it were but the premiers had the first laugh, that little episode. Was there anything specific you learned from that little episode about how to get reform done? Well, you've got to make sure that you cover all the pressure points that can be used against you. Right.

All the pressure points. Yeah. Even pressure points on your own side, you've got to make sure you cover the cover off all the bases. Yeah. And that certainly feels relevant to the GST story where you were meticulous about covering off those pressure points. Absolutely. absolutely. So I learned from that that if you could neutralise the state governments and the state premiers, that would be very important. And of course, I learned from that you had to lock in your

colleagues and your prime minister, right, so that when the going got tough, you couldn't be, they couldn't get through the back door. So I actually think, you know, the most clever part of the GST design, it's got many, many elements, but the most clever part, which I, as a result of that, came to the conclusion that we should do is we give all the money to the state governments, right? all of the GST goes to the state governments. So I could lock in these state premiers, many of whom, you know, were Labor and therefore opposed to GST, I would say, you're going to understand this point.

You're going to get the money, right? And they still do, under the legislation, the state premiers, the states get all of the GST revenue. And I remember when we were signing, the agreement, Bob Carr was the premier of New South Wales at the time. And, you know, 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 sort of 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. And 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 probably had since Federation. Before they got the GST, all they got was grant from the Commonwealth. 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, which was 10% of goods and services, they knew, they could have a fair idea as to how it was going to go and it would grow roughly in proportion to the economy. So that was, I guess probably I learned, you know, you can neutralise state premiers and states.

Australia as a federation, you had a much better chance of getting on with the reform. That's really interesting. So 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 of the 1996 premiers conference that inspired that idea of yours. Yeah, well, if you want to do, and this was broad-based reform, I'm sure we'll come to that in their moment, but try and lock in as many centres of opposition in advance. you know, another thing I had learned from the previous attempts to do broad-based indirect tax reform

was the social welfare sector had become a very strong opponent. So I thought we've got to try and lock these people in advance. And that led to increases in pensions, right? Sure, people that are on welfare benefits or government payments will have to pay more. Yep, under a GST. I acknowledge that. I accept that. But what I can do is I can increase their benefits to compensate them.

So their disposable income will be the same. There was another very important compensation mechanism, and that 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? The churches had been great opponents of how do we avoid a war with the churches? So organized 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 you had to explain to people why this would protect their position whilst giving an overall benefit to society as a whole. So, yeah, I mean, I learned some lessons. If you can neutralise the opposition before it materialises, you're in a much better position. Once it materialises, you know, you're in hand-to-hand combat then on. Yeah, yeah. just briefly, and this feels like kind of a naive question, but did you have like a physical

list of the different stakeholders you needed to lock in? Oh, yes. I mean, we, we hundreds. Lock in lists. Hundreds. Yeah. Yeah. I remember going around and seeing archbishops and going around and seeing social welfare

people and going around and seeing business groups and, and of course, negotiating with premiers, negotiating the state treasurers. Oh, yeah. It was a society-wide thing. Well, it was. You know, because you see, the thing about a broad-based indirect tax, GST, goods and services, tax, value-added tax sometimes, VAT, is your taxing, and our objective was to tax nearly every good and nearly every service.

Every day, every transaction. I mean, this is much bigger than income tax or company tax or superannuation tax. You know, this is, you know, as it was famously said, when you get up in the morning and you pull out your toothbrush, there's the GST on the toothbrush and there's the GST on the toothpaste and you go down and you turn on your toaster and there's the GST on the electricity and there was the GST on your bread, right? because we wanted to include food, you know, and then you hop on the train and there's a GST on the tech, right? And you go into the workplace, you know, there's a GST on your coffee, and there's a GST on your pen, there's a GST on computer, you know.

And this is what our opponents would say. And it was true, by the way. You know, it was true. So if you are introducing a broad-based consumption tax, GST value-added tax, right, 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, you know, in advance, I was basically trying to neutralise as many centres of opposition as possible. Yeah, sure. Okay, so I just want to take a step back. we'll come back to some of the lessons of the GST experience later, but I just want to go through almost chronologically and draw out some of the war stories from you.

So first, in August 97, you stood up a task force in Treasury under Ken Henry. And they worked in a separate building outside of Treasury. It was very secretive. That a safe room, special passes to get in. Unauthorized members weren't allowed in. And they began work designing the GST and modeling its economic impacts. and 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 13th of August 97 and the 13th of August 98? And so what did an average day look like for you? Well, you see, the scare campaign started immediately, right? So. In 97? Absolutely. Okay.

You see, you see, this was not new ground for Australia. You've got to remember that Australia had been through many GST debates, right? Keating as treasurer, it hadn't proposed really a value-added tax, but a broad-based indirect tax, right? A retail tax. Yeah, so-called, yeah, so-called option C, right? and that didn't fly. Then the coalition, which I was part of,

under John Husson in 1993, proposed a GST. And this time, getting from being a proponent, became an opponent, right? And had ran this enormous scare campaign and defeated the coalition on the issue in 1993, right? So Australia was fully attuned to this issue and to the scare campaigns.

And, you know, 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 task force. So to come back to your question, this started the day we announced we were going to go down this track. The scare campaign started. All the lines were there. They'd been well and truly primed from previous election campaigns, right? So basically at this point, you know, we're working feverishly, and I'm trying to quell horses.

Don't worry, we've got a great plan. You're going to see it all. And, of course, our opponents, you know, in order to get political. advantage. They've started a scare campaign already, you know. It's going to murder you. It's going to sort of 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. You know, so basically, I would say for those 12 months, we're in this foreign debate, scare campaign, even though we didn't have a policy. But everybody knew where it was going.

So what didn't they know? Well, they didn't know the rate, which we came in at 10%, which 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, you know, 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, or they could have worked out. Obviously, we're going to get wholesale sales tax and a few other indirect taxes. But the bare bones, you know, which was this would be on as broader basis, The bare bones, that was pretty well known. And that was enough for the scare campaign. But how did your, what did your average day look like? I'm just, just as a fly on the wall, I'm kind of curious for that 12 months.

You know, get up early in the morning, go on talkback radio with all the talkback radio hosts, do some morning television. You'd 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 nighttime television programs, late line, these sorts of programs, go on that, speak to the print journalists who are 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. So, 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. Yeah, it's funny. It's funny. Powerpoint was the most modern thing. And I'm not really a tech guy,

but I had some people who, can't we put these graphs up? And they brought this PowerPoint to me. I mean, graphs, colors. And, you know, 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.

So, ultimately, once we'd settled the policy, I went into the cabinet and said, Ryan, I'm going to present the policy, you know, they came in with the PowerPoint. It's the first time PowerPoint had ever been used in the cabinet in Australia, right? And, you know, I think I went for, I know, seven or eight hours or so. Explaining it. And it's obvious they didn't have a clue what I was talking about, because, you know, who would? And, you know, they're asking questions and it's going on and on and on. Finally, I think after about seven or eight hours, they called it quits.

And I said, right, you know, we're all on the same page here. We've all got this. And I remember walking out of the cabinet room with my own colleagues and I said, you know, how do you think of wet? He said, gee, I like the colours in those graphs, he said. How important do you think that tool of PowerPoint itself was to gaining cabinet? 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, you know, 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.

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 just basically play around. I've never seen anything like this before. Just play around with all sorts of thresholds, all sorts of rates, distributional analysis, winners and losers. So, so, you know, It was really good. It can all be done now. But you couldn't have done any of that without power.

You know, somebody said, you know, if you cut the 30% rate to 28 cents, 28% what would happen? And I could do a distributional analysis. And you could explain to people why he couldn't do that, but why he could do this. So it couldn't have been done. It just could not have been done without that. That's interesting. On this point about technology, would the GFST have been possible without Prismod and that technical capability?

Well, you see, this is what Ken and his team were doing. You see, 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. Now, here's the question.

What impact will that have on inflation? We know it will push prices up because that's at the final consumption level. These are all at the wholesaler. But will I 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, right? 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, I'm only giving 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. So would the GST be impossible without that? Very difficult. No, no. I don't think we could have done that either. I mean, you know, we could come out with a price impact. Yeah. Now, of course, models only as good as a model, right?

It's not reality. One of the things that sort of caught us in the middle of all of this was oil prices went up. Yeah. So we're doing all this modeling on an assumption of constant oil prices. Oil prices go up, right? So petrol goes up. So people said, look, you promise. as to petrol would only go up this amount, it's got up that amount. Try as I may. I'll 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. So a model zone is, you know, and then in your model, you've got assumptions about the exchange rate, for example, or 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. 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 the 1st of July 2020. Sorry, 1st of July 2000. And that date was important because it was before the Sydney 11th. 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 sort of 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? Well, our policy was to include food, right? Sure. And we won the election on the policy of exactly. extending the GST to food. Sure, but once Brian Harrodine voted against... So we go into the Parliament, right? We say this is our policy, get it through the House of Representatives,

goes into the Senate. The Senate, by the way, set up six or seven select committees, the longest debate, almost in, I think, second longest debate in Australian history. You know, the opposition is doing everything it can to defeat this. legislation in the centre, and we needed one more vote, right, to get food in. And the key guy, he was a senator called Senator Brian Aradine. I thought he was on the team right up until, right up until the time he went to vote.

And he said, I cannot. So at that point, food comes out. Yeah. That wasn't the plan. Yeah. So if food had been in, oh, yeah. Yeah, it would have been easier to implement. Sure.

Wouldn't have been harder. So my question was, at that point, so after the, after Harrodin votes it down and then you're forced to negotiate with the Democrats, at that point, was there a plausible path to getting food included or no chance? Well, the Democrats wouldn't allow food. Okay. To be covered by the GST. The legislation just wouldn't have gone through the Senate.

Yeah. We wouldn't have had anything at that point. Now, you know, I fought to try and persuade the Democrats that they should include food, but we're going to be in that. In your negotiations with the Democrats, did you and Howard explicitly agree with each other to play a good cop, bad cop routine? I don't know. We explicitly agreed, but it was pretty obvious, you know, that I'd live with this whole thing and I wanted the GST on everything, right? And I was doing my best to keep as much in as possible. Yeah.

Right. The Democrats were doing their best to get as much out as possible. You know, in the end, I think Howard was more amenable to compromise. I mean, 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.

Yeah. So it wasn't like a conscious negotiating tactic. It just sort of emerged organically. Well, yeah, I think that's right. I mean, you know, it was pretty obvious, you know, who was, who was, fighting for a small compromise in there. And of course, and of course the Democrats used that. They sort of blame me.

I mean, it wasn't a problem. I mean, really, you know, if they took out, you know, their objections on me, it gave us an opportunity to compromise as elsewhere. Yeah. So when it came to implementing the GST, if you think about all of the practical problems raised by that, so three billion price tags flipping at midnight on 30 June 2000, then hoarding and biostrikes, the threat of margin creep, etc.

Of all those different practical problems, which one turned out in reality to be the trickiest? The practical problems were enormous. The first thing is, right, every business had to register for an Australian business number. That was the first thing. Right. So we thought a million businesses would register.

I mean, after a few weeks, they've got two million registrations and rapidly going north. Where are all these businesses coming from? So at least twice as many businesses in Australia as you thought? Walent. That's so interesting. So right. So that's our first problem.

Who are all these? Why did we know about them? Where are they? You know, okay. So the next thing is... Most of these are just sort of mom and dad type businesses. Oh, yeah, yeah. The big companies we knew all about it, you know.

But these are mom and dad businesses who we'd never heard of before, right? Just coming out of the woodwork from... So, yeah, that's the biggest... That was the first problem. The second problem is all these businesses, including all these mum and dad businesses, right? They have to remit the GST.

They've got no experience of this. You know, there's no form, there's no precedent. So now we're running training schools, all through Australia, on how do you remit GST, right? Well. And then we establish helplines, right, so businesses can ring in. ask questions, right, in call centres.

It was great, but the problem is that people in the helplines didn't know either. They didn't have any more ideas as to how this is to be done. So is this huge registration task, this huge educational task, this training task, you know, 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 bet all this down. And, you know, then, then, and this is what I didn't appreciate until pretty late in the piece.

The two big supermarket chains here in Australia, it just came to me and said, you realize the GST comes into effect on midnight on the 30th of June, yeah. So there'll be one price, up till midnight, there'll be another price from 12-01. Yeah. Do you realize we will have to change the price of three billion items, three billion, between 1159 and 12.01? I thought, ooh, that's a problem. What are we going to do here?

This is the dimension that you... Well, I mean, why would they come? In that situation, isn't that kind of just their problem? What kind of help were they expecting to get from you? Well, you see, I think barcoding was coming in, but not everything was barcoded, right? Point one. Point two, you see, we'd assured people

that we'd stop businesses from price-taking using the tax changes to basically fleece the customer. right um so i had to have you know pretty good answer to to that sort of thing yeah um and you because the atmosphere was so febrile people were saying you know what's going to happen what's it's like y2k what's going to happen it's going to happen at midnight uh on the 1st of july and you know so they were just these enormous technical yeah and practical problems.

And you see, it was complicated by the fact that as part of the compromise with the Australian Democrats, we had to take food out, right? So you go to a supermarket, right? Here's a prepared bagged salad, which might have GST, and there's a fresh salad that doesn't have GST, right? What's the price differential going to be? So the simplest way of doing a evaluator tax, just put it on everything. thing, 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, fresh chicken's not taxed, cooked chicken is. You know, how do you tell the difference between a fresh chicken and a taxed, a cooked chicken? What temperature does it have to go to to be cooked, right? This is one of the questions. Yeah. This was Simon Crane, right? Yeah.

Stick a thermometer into the chook and decide whether it's taxed or not. There's a fair point, but, you know. So in the end, you know, as we're leading up to it, and there were no tax rulings, right? Because we've never done this before. There's no tax rulings. So I just said to attack office at one point, just bring up your 50 artists. issues, and I'll give you a ruling in my office. So they came in, they said, you know, what do you want to do with this? I'd say, we'll do that. So is the responsible minister,

you had the right to issue those? Well, look, there was no precedent. Yeah, yeah. And I'd draw on the policy. I might as well do the ruling. I remember a guy from KPMG said to me, he said, look, the accounting firms would discuss this. They'd agonize over this for months, you know, trying to figure out a ruling. I said, we don't have months, right? Yeah, yeah. I'm going to do in my office today. 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 bringing, calling in the ATO commissioner and just issuing the indicative rulings yourself, that story.

And then also, I think maybe this is late 98, but correct me, when you set up, you basically Phil Gutchins, you're then chief of staff, you set him up. in a sort of war room, he went offline, and his job there in this separate unit in your office was just to fight the attacks on the GST. But it just struck me, it feels a bit analogous to sort of a startup where you don't have a playbook, you're using intuition, you can be quite creative, and you're just kind of making these decisions without precinct. There's not really a question here, but it just... Yeah, well, you might as well do it because who else is going to do it, you know? I mean, tax commission doesn't know.

I mean, I've written the policy. I might as well do it. You know, that was basically where we were. So, you know, some of them probably had to get refined over the years. But basically, I reckon I've got about 95% of them right. It's quite a creative act of politics when you think about you're kind of doing things that don't have, you're not being given a playbook that's not necessarily precedent. You realize you can do stuff within the bounds of the rules.

And so you do it. Particularly if you're in. Virgin Territory, right? Yeah, yeah, you can make the rules, right? So 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 got to administer it somehow. So who was going to do the rulings? Well, I'll do it myself. So of all the practical problems, which one? turned out to be the hardest? Well, the hardest in the end, I think, was, so we're getting there, we're getting there, we're getting there. The first quarter went very well.

I mean, well, but then I think, you know, business basically said, well, we've got through the first quarter, we've survived, you know, geez, we have to do this every quarter, do we? You know, and we started getting resistance, I think, on the second quarterly return. That was hard. The other thing that was hard, if people don't realize, is the interplay between GST and excise was unbelievably complicated. So, you know, 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, well, it's not that hard. Well, the trouble is you had low alcohol excise, medium alcohol excise, heavy excise, 10%.

And then you had packaged beer, fresh beer. They had a different price because there was a service component in the fresh beer, you know, poured in a pub. And then, of course, you had wine, and then you had spirits. And all of these variables had to be interplayed to produce a particular outcome. And it's the same with petrol, you see. There's a petrol excise and a 10% GSC. So you'll amend the petrol excise so that when the GST goes back on, you move the price by the requisite amount.

But whilst that's all going on, oil prices are moving. price is moving, right? So, you know, you carefully constructed calculation, which was right, was right for the tax change, but it wasn't right for the exchange rates. So, you know, you've got a million variables going on and you've got a political opponent's down your throat. You've got the press that, you know, are breathing fire against you. You've got to head up for an election in a year's time. It's just, you know, I just don't think I thought about anything else. for two or three years. It was just, it just.

One other story, so when the tax finally comes into effect on the 1st of July 2000, I think you quite effectively leveraged the then head of the ACC, Alan Fells. Can you tell me about that and the role he played? Oh, well, see, so, you know, people said, oh, well, you change the tax system, get rid of the wholesale tax, put on an evaluated tax, OGST. You know, businesses are going to price take. They're going to rip us off. And, you know, what's to stop us being ripped off by all these businesses?

Oh, well, we'll get the A-TCCC to price monitor. If they find anybody under cover of the tax, you know, increasing their margins, it will come down on like a ton of bricks. So Alan Fells was the head of the A-T-R-C at the moment. I mean, by the way, he loved media. He just loved media. He's out there every day giving expositions on what he's going to do to this business and that business. It's like a war correspondent.

Oh, boy, yeah. He was like the scene of the action, right? And I'm sitting in my office and he's ringing in during the day, you know. We found a coffee shop in Sydney and it did this. I said, I've wrung them up and I've fixed them. And, you know, we found a bike shop down in Victoria. It's like a war room, you know. I'll go on your, Alan, keep going, you know, get up on the media.

I didn't need any encouragement to get up on the media. I'm going to tell you that. Were there any other individuals like that who turned out to be unexpectedly very useful? Oh, he was very good. He was, you know, he was doing what we'd asked him to do. Yeah. Were there any other individuals who turned out to be? on the implementation. Well, the implementation, no, you know, that was hard. I mean, there were

people that certainly helped with the arguments, I think. I, you know, I think, you know, as I said, I think we neutralised the state government. So I think, I think in the end that the welfare sector, it never supported us, but it didn't go for us in the way it could have. So, you know, I think that that was good from my point of view. I think business was mostly supportive because, you know, business gets all of its GST back, right? So it was good from a business point of view. They passed on to the consumer and they got tax back on all of the inputs. So they came out well in front.

But, you know, you've got opposition in unexpected places as well. Yeah, yeah. The only thing I'd say about all this is you've got to remember. So we get rid of wholesale sales tax. We get rid of about five state taxes. We introduce a GST. We cut income tax. We change all of the benefits.

We give the revenues to the state government, which changes Commonwealth state financial relations. There'll never be anything as big as that again. And I wouldn't want it. I wouldn't want anyone else to have to go through that. Now, here's the point that always intrigues me. The GST has been in place now for 25 years. The one 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 just become a very permanent cornerstone. of the Australian taxation.

It's just now raising $100 billion a year. It's not bad. If you'd have said to me 25 years ago, this rate and this base will be unaltered in 25 years time, I would have thought you got two heads. But, you know, I think that's an achievement, really. It has been the most certain part of the Australian taxation system. for quarter of a century.

Now, from time to time, people come along and say, oh, we should change the base, we should change the rate, whatever. But it's been fixed and it's been certain. And 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.

So 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. You know, and the Commonwealth would cut it, could 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 there. So it's the only meaningful thing

that's addressed vertical fiscal imbalance probably since the Second World War but what you can't stop is subsequent governments coming around and playing with the formula as in fact happened which I think is undermined its credibility. Right, right, right, with the W-A deal.

Yeah. With the, so that, so the agreement with the states isn't legally binding. So a future Commonwealth government could always raise the GST. Well, it is legally binding, but the Commonwealth could legislate. Sorry. Right. To legislate itself out of that agreement. Yeah.

Without needing to get the state's consent. Exactly. It's legally binding by act of the Commonwealth Parliament. Right. 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.

Yeah, yeah. 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. True. Do you still have it? Yeah.

Up here. inside the crown. So, you know, during this, I had a lot of dental trouble. And so I had to get a crown on my tooth. And, you know, when the dentist comes to put the crown on, he looks at it, he starts laughing. I said, what are you laughing at? Oh, he said, my technician's got a sense of humour.

What do you mean? Well, the technician who's made this crown for your tooth, he's inscribed the letters GST into the gold crown on your teeth, right? 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. That's great. Okay, actually, before we get on to the general questions,

I have one completely unrelated question. Unless there's someone else out there that has GST on that. that would be in their in their case at least that would be an odd decision but before we go into the general lessons i have one completely unrelated question i'm just interested in in sort of how government works and i was trading with someone the other week and um i learned that so when it when it came to the budgets and important context here is sort of the early years the mining boom revenues sort of flowing into the government coffers um but someone was telling me about the hunting license letter and how in order to keep spending under control, you wouldn't even

tell the Prime Minister about revenue until sort of the very last minute. I just found that interesting that even the Prime Minister wouldn't know about those numbers until the very last, you know, the 11th hour. Can you just talk about that? Well, you see, you know, I look at it as two phases. There's a first phase Australia was in the doldrums and mining was a, you know, very unfashionable industry right up until, I did my first budget in 96, right up until 2004. In 2004, the China boom starts taking up and we're starting to get upside on revenues. And, you know, I wanted to run surplus budgets and pay off debt. And I was concerned that if it was known that the revenue was booming, my colleagues would spend it.

Including the Prime Minister. My colleagues. So, you know, basically I was holding back the revenue estimate. Anyway, after a while, he figured this out. And so he'd demand the revenues much earlier in the piece. So I basically held back a little more than I had last year. So the expectation was he's only holding back 1%, right? Now he's holding back 2%.

Yeah, yeah. So we could run surplus budgets, you know, and I think at the end there, we got the surplus up to about 2% of GDP, you know, which is, you know, unheard of. But, you know, the pressure on in the 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. They'll spend after all the money's gone because you can borrow the difference, right? So I kind of felt I was one out against all these spenders in government. It's interesting the dynamic, even between a treasurer and prime minister in that regard. Yeah. Okay, let's talk about some lessons.

So 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? Well, it had been tried before, right? So, yeah, the Keating, it wasn't the same as, you know, it wasn't as well designed as the GST, but he'd had a go in 85 and failed. the Houston and the coalition in 93 had failed. I mean, my view was this had to be done in Australia. And we'd never get it out of our system until it was done, right?

Just had to be done. You know, even if I'd have said, look, you know, I'm against it or whatever, you know, put it kept coming back and coming back and coming back. So it's got to be done. no, 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-mits-switch. You take an increasing amount out of the consumption, out of spending, so you can take less out of earning income. That was the big macro point, right? And there was a switch, not as big as the switch would have been if we'd have included food as well, but there was a switch. That was the big economic point. We didn't say it like that, but that was the big economic point in all of this.

So 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? Well, you'll never get anything of that scale. It just can't be done. You see, that was a tax miss switch, a federal state switch. It was an indirect tax on $3 billion prices. You can't, there is nothing.

There weren't opportunities for other things of that. There's nothing more to do of that dimension. Right. But we did do other things. After that, we did company tax reform, cut the company tax rate and changed a whole lot of things on company tax. But, you know, there's nothing to do of that dimension anymore. That affected indirect tax, personal income tax, welfare, Commonwealth State, you know,

the whole thing. You know, even if you picked up a pencil tomorrow, you couldn't do anything as big as that. So people often date the so-called reform error as beginning in 1983 with the Hort Keating government finishing in 2000 within. introduction to 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? And that doesn't necessarily mean you were able to get less done by the end, just that it had gotten harder over your time in government. Did you notice any shifts? I think my experience was in government

that as you go on in government, you get worn down. Bit by bit you get worn down. And, you know, seldom do you have the reforming zeal in a fourth term that you had say in your first term. That was my experience. I mean, we were still doing stuff and I was still doing stuff. I mean, the Future Fund, for example, 2004, and it was very important to Australia's future.

We tried to do labour market reform in 2006-7. But it does, you get worn down, you get more tied, your opponents get a fix on you, you've expended enormous political capital doing this, bit by bit you get worn down, I think. Right. That's why I always say, you know, 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.

So Albao and Chalmers have missed the boat to get anything big done? Well, I don't know what they want to do. You know, obviously they want to put up the tax burden and increase spending. And 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's all depends what you define

as reform actually so 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

that in the second. In the second, you could maybe really only count one being the NDIS. And obviously, it's subjective as to how you want to define major economic reforms. Maybe it's more... I wouldn't regard there as an economic reform. Okay, sure. Okay, so maybe you'd say there's been zero. There's a spending program. Maybe you'd say there's been zero in the second period then. But that just sort of starkens the conclusion. So 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's so much more difficult to get major reforms done. See, it all turns on what you mean by reform, right? Now, here's what I mean by economic reform. Okay. I think economic reform is things that make... our country more productive. Yeah, I'm happy, very happy with that definition. So stuff that increases productivity growth by a meaningful percentage.

And leads to high living standards, right? Yeah. That's what I would describe as reform. Now, I agree with it. It hasn't been much in recent years, right? But if you want to say spending programs are reform, well, we've had lots of reform, right? because we've had lots of big spending programs.

We had a big spending program after 2008, you know, the pink bats and the school halls, and we had a spending program for COVID, and we had a spending program. But, see, that's not what I'm talking about when I talk about reform. So, you know, I think, you know, if you're saying we seem to walk 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. I think that's a big part of it. But why have they lost interest?

Because it's hard. And they've found another way of getting votes. And that's borrowing money. So we've become a victim of our own prosperity. In a way, yes. You see, we got rid of debt. We became debt-free. 2004, debt-free.

A lot of work, we became debt-free. Now, you know, people look at that balance sheet, and they 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, right? And, you know, the funny thing is it's sort of like

if you've paid off your mortgage, right, and you're sitting there and you've got a house that's worth something, you could either go and buy a better house or you could say, can run up the mortgage again and live off the borrowings. And that's easier. and that's basically what we've been doing. So we went from having no net debt

to having over half a trillion of net debt. And this allows the political class to make promises, 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, they still say, 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. And I think that's what's been going on over the last, particularly over the last 15 years. So it's just too tempting. It reduces. It's easier. It's easier. And there's no sort of like a wolf at the door to motivate. And there's no wolf at the door yet, right?

Yeah. 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, you know, the next decade. And, you know, then we'll be more exposed. But, you know, that's working quite well at the moment. So that's what you think is the biggest thing that's changed? Yeah, I mean, in a funny kind of a way,

I think we're victims, we were victims of our own, success, having got the balance seat so strong. It just invited people to run it back down again. Yeah. Has there been a time in Australian history where we've had a decade of prosperity and we've managed to sort of resist the temptation to get complacent? Was that just sort of the natural order of things? I don't think, you know, I mean, you look back through the times of prosperity in Australia. They generally ended badly. Yeah, like the post-war era ended up. Well, you know, The Korean wool boom and all of that kind of thing. It ended in, you know, 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. You know, in many respects, managing prosperity is harder than managing adversity. Yeah. Yeah. Was that famous line that The Economist wrote about Australia? It's like where we're great managers of adversity and terrible managers of prosperity. Yeah, I think there's something in that.

Yeah. It's very hard to say to the public, you know, you've got to keep working hard on these things year after year after year. The public says after a while, gee, you know, let's make some whoopee. You know, and so you make some whoopee and it generally ends badly, and the public says, okay, well, now you can fix things up. But every now and then they like to make some whoopee to get some, benefit.

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. On balance, well, I mean, firstly, do you agree with that claim? And then secondly, on balance, do you think that that norm has been a good thing or a bad thing? The nature of politics is that your opponents will exploit any losers. So 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 again. And, of course, when the GST came in, it wasn't a fully-fledged tax like it now, because it wasn't raising $100 billion. So, you know, it was important to give compensation to get it through. But once you had it in, right, it just keeps on growing in proportion to the economy. you know, politics being what is a... See, look, in politics, there's easy stuff and there's really hard stuff.

I would say tax reform is the hardest, right? Particularly tax reform that affects every person every day. That's just of a dimension all itself. And that's why, you know, it can be done once every 30 or 40 years or something. And then 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 one-off. That's suey generous. You're never going to see that again. Other more limited things will not be governed by the same rules, I don't think. 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?

Did I give them? Yeah, after you left politics. I remember once speaking to the Russian minister. I wasn't expecting this, but yeah. He was trying to broaden his indirect tax base. And I said, is it true as I read that, you know, tax collectors in Russia have Kalashnikov rifles? And he said, yes, but only for self-defense. That's great.

Good advice, I mean for self-defense. Any general advice on a lot of self-defense? reforming that you've given to? Well, you see, the most important thing is, I think, to actually know what you mean by reform, right, and know what you want to do. I hear a lot of people say, oh, we should reform, should reform the tax system. Yeah, okay. What part of the tax system? Oh, I don't know.

I think everything should be on the table, I say. Okay, put everything on the table, right 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 sort of, this is, 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, you know, I think the most important thing is you want to go down the reform part. Just tell me what you mean by reform. What outcomes 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. Right, right. It's just wish fulfillment up until then. Yeah, yeah. 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. That's right. Oh, yeah, could be in this. Yeah, that's good. All that. Yeah, yeah. It could be in that too. All this. Oh, yeah. Yeah, as well as that. Okay, yeah. Yeah. I mean, I'm involved in a startup.

Don't, don't ask me what it does. Don't ask me how it makes money. I'm just involved in a startup. What do you think is the most non-obvious skill that are successful productivity enhancing reformer needs? I think the most important thing is the ability to communicate the benefits. But what's the most non-obvious thing? I know that's probably putting you on the spot a little bit.

Well, I only deal in obvious things. What does, okay, what do you mean by being a good communicator? Well, you see, I think if the public hears productivity, they think, oh, that's bad. You know, I remember once I said, because we're living longer, we can't afford to retire at 65 anymore. And my opponents went right down my throat and they said, Costello wants you to work till you drop. That's pretty powerful, actually,

you think it. All these people out there heard that I was going to make them work until they dropped, till they died at work. That wasn't what I was talking about at all, right? But your opponents are entitled to misrepresent you and they're entitled to make political capital out of it.

And so, you know, for a while, you know, work till you drop treasurer, and Peter Costello said today, did that today, the media in the whole thing, right? So I think, you know, when people hear productivity, they think,

ooh, it just means working out, of working longer, getting less. They don't like that idea. So the most important thing, I think, is to be able to communicate. What will they get from productivity? Right? And ultimately, what they will get

is they'll get higher wages and better living standards. That's why we're doing all this. We're not doing this, you know, to satisfy some equation somewhere. We're doing this to give you a better life, right? And I think the most important thing is to be able to communicate that. Okay, to finish with some questions on the baby bonus. This episode is sponsored by Vantor. Trust isn't just earned, it's demanded.

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That's v-a-t-a-com slash joe for $1,000 off. Last week, the total fertility rate number for 2024 came out. The TFR has now dropped even further. It's down at 1.48. Curious, if you could take me back to the internal conversations that were happening in government in the early 2000s. I guess the first intergenerational report comes out in 2002. It makes salient a lot of these concerns about an aging population and the fiscal consequences of that, the 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 that was announced in the 2002 budget. But then that was superseded by the baby bonus coming in in 2004. What was the main rationale for that raising fertility, supporting families? No, it wasn't, you see. So when the baby bonus first came in, it was actually a tax concession. This is the first child tax refund. Yeah, well, basically, you know. This is in 2002, right?

Yeah, yeah. Yeah. Basically, the idea was, we're trying to help new families. And the idea was if you went out of the workforce, right, you lost the tax-free threshold, right, that you would have got for the years you're at home raising a child. So we'd give you a tax break. This is how it all started off. you 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. And I was just thinking to myself, we got that baby bonus, which is basically a tax break. We used to have a maternity allowance We used to have an immunisation allowance, you know, different qualifications, different income tests, different ways of claiming it.

So we've got to cut through all of this. And, you know, I'll get rid of all of the income tests and I'll get rid of all of the different rates. We'll just have one thing universal on the birth of a child. And so I added up what all the benefits that then existed in, I think it was $3,000, $3,000. Love some, $3,000, couple. Actually, didn't even call it the baby bannish, you know. It was called a maternity payment when it came in. And so simple, universal, right.

And I remember, I mean, this is how politics gets made. So 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. And I said, well, how many you got? And the journalist said, well, I got two. And I said, well, why don't you have one for the country? Right.

And that's how it happened in the press conference. It's not in the budget speech. it's not in the budget I just said in a press conference have one for the country I get into a lot of trouble from that because you know

someone of my staff says you shouldn't encourage journalists to breed you know and that's how it happened and then it sort of got into the press you know have one for the country

and the British press picked it up one of the papers over there might have been the Daily Mail or one of those projects and they covered the budget under the headline and never forget

This, Australian treasurer says bonged down under, right? That was the headline, right? The British press, it gets pushed back to Australia, you know, pushed back to Britain. And that's how it all happened, right? So it wasn't actually at all, you know, a measure to increase fertility. It was a rationalisation of all these other programs into one lump sum, which would be universal.

Interesting. Now, alongside of 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 aging of the population and the declining fertility rate. So, you know, I was saying we had to arrest the declining fertility rate, and I was also saying we've simplified

the maternity payment, right? And the two get conflated together. And it became sort of like a little sort of humorous anecdote of Australian political life. Now, you know, the interesting thing is, much to my amazement, in fact, the fertility rate did kick up, right? So it wasn't done to kick the fertility rate,

But I think it had an effect. But I think the most important thing was not the bonus itself. The most important thing is we talked about the need to arrest the decline of the fertility rate. I think it was talking about the issue, talking about how the declining fertility rate would affect us badly, talking about how it would be good for society if we could arrest the declining fertility rate. And the baby boners just kind of fitted in with that narrative. But I think it was the narrative

that actually had an effect. Yeah, interesting. You know, I think you could introduce the baby boners tomorrow, right? And it wouldn't have any effect at all, right? Because unless somebody's talking about fertility, unless somebody's talking about the effect it will have on society, you know, it wouldn't go anywhere. It would just be another benefit.

But 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 just get conflated and off we go. So 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 one of the, 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. Absolutely. That's the one for the country, right? So, you know, if you're thinking about arresting the fertility rate, you know, the if a family has two, well, replacement levels 2.1, right? That doesn't get us back to replacement level. The only way on average of getting back to a replacement level

would be if we had, on average, three. And obviously people who know how to have kids and enjoy kids and have two, you know, they're probably the people that are 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, you know. I had one for the country.

Oh, good. Oh, fantastic, good on you, you know. But they weren't doing it to get a baby bun. There's nobody in their right mind would say, oh, well, you know, I have a child, which just cost you, I don't know, a million bucks or more over its lifetime, you know, to get a $3,000 bonus.

I don't think that was the point at all. I think the point was the sort of the men message was it, you know, it's good for society, it's good for you, you know, don't feel bad about being out of the workforce and having kids, right? They're actually doing a good thing for you, and it's going to help us all if you do it. I think it was the message that made a difference. So 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 venous created counterfactual babies rather than just bringing births forward. It's a funny expression, counterfactual babies. It's not the most romantic. I don't know what a counterfactual baby is, but still go on. So births that wouldn't have happened anyway. And 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 the number of births exactly nine months after the announcement. And so births increased by about 6.5%. The second big update for me was it was much more cost effective than I was expecting. So the cost of an additional baby using the $3,000 price, the $3,000 benefit was about $50,000 in 2004 terms, I think $86,000 in 2025 terms. The reason I was excited by this is I think global fertility declines 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. like there are these broader cultural forces at play. And there's this question of can we use policy to influence the fertility rate? And this seems to be, we need lots of experiments around the world to help us answer that question. And this seems to be quite an interesting and important experiment. You know, to some people that might seem like an expensive price tag for a counterfactual baby, but I don't think it really is.

And at least we know what it might cost to say. civilization. So I was quite excited to see that. I don't know if you had any reactions to the research. Well, you see, you know, undoubtedly there is, we first of all, arrest the decline in fertility in 2004, and then we sort of marginally tick it up. This is a very unusual. Now, I've heard people come up with all sorts of explanations as to why that happened. And then when the government changed, Labor dismantled that whole program, and you see it go down again. There was something happened to the TFA, the total fertility rate between 2004, 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 is related to the intergenerational report and the baby bonus, right? Yeah. Not saying totally, but somehow. There's no explanation that can exclude them. And then, of course, we were thrown out of government, Labor comes to government, it starts dismantling the baby bonus, and it replaces it with page.

parental leave. Paid parental leave was much more expensive than the baby bonus if it was. And paid parental leave comes in and the fertility rate starts declining again. Now, I'm not criticising paid parental leave, but the one thing we can conclude is paid parental leave doesn't increase the fertility rate. Right? Because we can see on the crafts, you know, paid parental leave comes in. And the fertility rate starts to decline.

That's not to say we shouldn't have paid parental leave. I think we should have. But the one thing we can conclude is paid parental leave doesn't affect fertility. You can leave the question open, the baby bonus in the intergeneral or paid may well. So, you know, and this is the point I make, you know, you want to look at the martial cost of additional children. and you say, oh, well, there's 50,000. I don't think that's a 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, by the way, if it produces no additional children? What is the marginal cost? It must be infinity. It's the cost over zero. Right? Now, I don't think that's a reason to say paid parental leave's no good. I mean, because 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, right? 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, you wouldn't just sort of measure its value on the number of additional kids alone. Right, right. That's my point. Yeah. 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, right? Look, because something undoubtedly happened between 2004-2008, people around the world have noticed this, right? This is one of the few Western countries that, for a moment in time, turned probably the only one, turned the decline of the fertility rate. So, you know, I have a lot of people from overseas come to see me about this to talk about the experience. right and and and it's noticed it's it's it's so rare it's so unusual it's it's noticed around the world and a lot of countries are trying to experiment now I don't think and I say to visiting ministers and visiting heads of government you know I don't think you could

introduce a baby bonus tomorrow and see your fertility rate tick up Back, if you reintroduce it in Australia tomorrow, I don't think anything would happen. That's not the key. The key, actually, I think, is to talk about the issue and to talk about the importance of children and families and the contribution that they make and to value them. Now, 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, I think. And you can't get away from that, you know.

If the attitude is, well, a child spoils your life, it sort of interrupts your career, it costs you a million dollars, you know, you've got to buy a new car because, you know, your car's not big enough or build a new bedroom, your house is not big enough or, you know, pay for child care. If the message of society is, you know, basically a child's a bit of a burden.

And having children is hard. We all know that. But if the message is, you know, it's a bit of a burden, you know, 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's going to 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.

It's not the dollar sum. That's the point I always make to these visiting people. And, you know, we've got much more benefits for, for, For kids now, we did in my day, we didn't have paid parental leave, right? Child care benefits are much bigger than they were in my day. But the fertility rate still declining, because it's not really a monetary thing. It's the message, I think, that's important here. Which might imply that it's the cultural causes that are more important here.

I think that's right. And when I say culture, I mean, it's sort of, is perceived to be, I guess, less cool to have kids or to have lots of kids. It's a bit of a burden, you know, gets in the way of your life. I think that's sort of, you know, the thing that always amazes me is where the fertility rates highest generally in developing countries, you know, it seems to be a fact of life As society has become wealthier, they have less kids. So you can't say it's a monetary thing, right?

It's much more than that. It's culture, it's lifestyle, it's all of these. You could say it's an opportunity cost thing, but I think the fact that it's coming down, even in countries like India, Like if you take Uttar Pradesh, 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 just, it's a weird thing. So, see, you know, undoubtedly as societies become wealthier and as India becomes wealthier, they have fewer children.

Yeah. You know, that's that's that's that's the conundrum. So it can't just be about money. then someone will say to you, oh, that's because, you know, as they become wealthier, they learn about birth control. As people know about birth control in developing countries, you know, it's more a lifestyle thing. There are some countries where they have high birth rates for religious reasons. But in developed society,

The fertility rate just seems to be on an inextual decline. Now, 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 there are a lot of countries that don't, the countries of Europe, I mean, you want to look at Russia or Italy or Japan, and more people dying that are being born in these societies. You know, these societies are sort of starting to die on themselves. This is a very bad inflection point for these countries. We're not there yet. But if this fertility rate continues 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? You know, if everyone's old and, you know, 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. Yeah. Last question on all of this. So Australia hasn't had a population policy since the post-war

era. In the post-war era, Corwell and Schiffley set a target for a certain population by certain date, and they wanted 2% population growth per year, 1% from natural increase, 1% from net migration. So 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 you 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 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? Well, you see, there's two elements to population, isn't it? There's natural increase and there's immigration, right? Yeah. I think we just decided, you know, we don't seem to be doing anything about natural increase. That's, that's just declining. That's locked in.

That's baked in now with these fertility rates. It's 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? Yeah, I think it should. You know, I think we should have in our. minds, and I think it should be announced, what the sustainable level of immigration is. At the moment, it's just varying very, 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. Yeah, I would agree with that. But so migration's an input here. Do you think we should have a target for the population as a whole? Migration's the biggest, biggest input, you know. I mean, it's sort of more than 75%,

more than three quarters of the input here. But should we be thinking about a sort of a percentage or a target for the Australian population as a whole that we want it to hit? I think we should be thinking, you know, I think we should be thinking what is a sustainable increase and I think we should also be thinking to ourselves what kind of migrants are going to be the best migrants for Australia. I think that's another part of the whole thing. You just, I think you can just sit there.

You raised Curtin and Chifley and Arthur Cawall. Now, they were operating a white Australia policy, by the way. And we wouldn't operate a white Australia policy today. But, and we shouldn't. But I personally believe the, my. migration policy should be totally focused on skills. That's where it should go. And we should get much more serious about skilled immigration.

Just to finish, it strikes me, I want to sort of come back to something in our conversation about why the reform era ended and the fact that it's ended. Just as a kind of broad reflection on Australia's deep political culture, it strikes me that implicit in this whole. in this consternation about the reform era ending is just this quintessentially Australian attitude that government has a role to play and should be playing a role. So you're like a fabulous example

of a representative of the small ill liberal tradition in Australia. But even you are worried about the fact that the reform era has ended. And this is so far from like an American style, libertarian view where that wouldn't even be a concern. I don't know, there's not really a question here, but it's just sort of an interesting reflection

that this worry about the reform era ending seems to be like a quintessentially Australian worry. Look, you see, I think it's a mistake to try and draw lessons from the United States into Australia. The United States is just one of a kind, right? It's the biggest economy in the world by far. Whether policy is good or whether policy is bad in America, it's just an economy that just rolls on.

It trades with itself. You know, it's just got this huge momentum that just rolls on. I think Australia is different because we're a mid-side. country. And I think if we want to be strong, we've got to have good government and good policy. I think America can be strong without it. And is. You know, 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. And that's my message is we've got to work harder at these things.

Just because the Americans are doing whatever they're doing, don't think we can, 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-sized 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 and that's my message it's good message all right this has been a lot of fun

thanks so much better thank you very much cheers I hope you enjoyed this episode if you did you can support the show by leaving a five star rating on Apple Podcasts or Spotify or by subscribing on YouTube

thanks to this episode sponsors you can find them in the episode description and thanks to Bill Manos and the Manos Foundation for their generous patronage of the show. If you'd like to become a sponsor or patron, you can go to jnwpod.com slash sponsor or email me at joe at jnwpod.com.

That's joe at jnwpod.com. Thanks for listening. Until next time, chow.