Early political career

In 1990, Costello defeated sitting member Roger Shipton in a preselection ballot for the comfortably safe Liberal electorate of Higgins, the seat once held by Harold Holt and John Gorton. He entered the House of Representatives at the age of 32. Costello made his maiden speech in May 1990 and mentioned "government should be subservient to the citizen; the Executive accountable to the representative parliament; and the monopoly give way in the face of the individual."^[14] Following the resignation of Andrew Peacock, Costello voted for John Hewson to replace Peacock as Liberal Leader and Costello was made shadow minister for Consumer affairs and later Shadow Attorney General.^[15][16] However Hewson despite launching Peter's local campaign in Higgins, despised Costello making it clear to him that he would not be appointed a Minister in a Hewson government and always maintained suspicion about Costello due to his admiration for John Howard.

On one occasion Hewson accused Costello of bad mouthing him to journalist Laurie Oakes which Costello denied.^[17]

Hewson's shock defeat at the 1993 election, Costello believes, can be attributed to Hewson lacking the experience to know which things to try to change and which things to avoid trying to change. Costello believed Hewson fought everyone from Churches and Welfare groups over the GST to the Superannuation and Medicare organisations and recipients. Costello claimed he found it hard to promote the Liberal party's zero Tariff policy to the car industry.^[17]

Costello's profile became higher following the 1993 election becoming Shadow Finance Minister after his failure to become deputy leader. After the "sports rorts affair" with Sport Minister Ros Kelly: after revealing Kelly did not handle funding properly for the policy, Hewson and Costello demanded she resign, and she did, this and other factors made Costello be seen as alternative leader to Hewson.^[18] Hewson was deposed as Liberal leader in May 1994, Costello supported Alexander Downer for the leadership, becoming his Deputy Leader and shadow Treasurer. What may have prevented Costello from challenging Hewson for the leadership himself was that it would have proven correct an accusation by Victorian Liberal Premier Jeff Kennett that Costello and his friend, former Victorian Liberal party president Michael Kroger, had undermined Hewson's leadership prior to Hewson calling the leadership spill that partly occurred because of Costello in the first place.^[19]

However, Downer resigned in January 1995. Costello did not seek the leadership, instead supporting John Howard. It was revealed in July 2006 that this was due to a December 1994 meeting between Howard, Costello and Ian McLachlan during which Howard allegedly agreed to stand aside after one and a half terms as prime minister in return for Costello's agreement not to challenge for the leadership. Howard denied that this was a formal arrangement.^[20]

Hewson noted with irony in 2009 that Costello's best chances of becoming leader were at the 1994 leadership spill or when Downer stood down, several months later.^[21]

As Deputy Leader until 2007, he was the longest serving in that role, achieving that status in 2006 after breaking the record of the party's first Deputy Leader Sir Eric Harrison. He also spent all but the last two years of his career on the front bench.

Federal Treasurer (1996–2007)

The Liberal/National coalition headed by Howard won the 1996 election, defeating the Keating government on a 29-seat swing, and Costello became Federal Treasurer at age 38, the same age at which Howard himself had become treasurer in 1977.^[22] He oversaw the return to and maintenance of federal budget surpluses, which enabled significant reduction in government debt. Costello brought down twelve consecutive Federal Budgets, including ten surpluses. During this period he eliminated the Commonwealth Government net debt of $96 billion. He also sold 2/3rds of the Reserve Bank's substantial gold holdings at a record low price. Inflation, interest rates^[23] and unemployment all fell and remained generally low during Costello's term as Treasurer.

Tax reform became a major policy focus for Costello. Although John Howard had promised during the 1996 election campaign that he would "never, ever" introduce a GST, it returned as Liberal Party policy for the 1998 election. It was passed through the Senate with the help of the Australian Democrats. Until July 2005, Costello's own agenda of labour market deregulation remained blocked by the government's lack of a Senate majority.

In 1998, Costello and his wife Tanya, along with Tony Abbott and his wife Margaret, successfully sued author Bob Ellis for false statements he made about them in his book Goodbye Jerusalem.^[24]

Costello advocated for change to a republic at the Australian Constitutional Convention 1998. He rejected any suggestion that Australia was not already an independent nation and said that the Australian Constitution works "remarkably well". It was the institution of monarchy that was the crux of his argument for change:^[25]

It is commonly said that all this argument is about is whether we want an Australian as our head of state. If that were all we wanted, one of the options to fix it would be an Australian monarchy but, in truth, the problem is more the concept of monarchy itself. The temper of the times is democratic; we are uncomfortable with an office that appoints people by hereditary. In our society in our time we prefer appointment by merit.

Costello supported the 1999 referendum on whether Australia should become a republic.^[26]

After the 2001 election, he attracted criticism for not securing funding for a key election promise to extend the Medicare safety net.

In 2002, The Baby bonus scheme was reintroduced by the Federal Government of Australia in the 2002 budget was aimed at offsetting the expenses associated with bearing a child. The scheme was also introduced as a means of increasing Australia's fertility rate and to mitigate the effects of Australia's ageing population. Costello famously had a slogan to encourage Australians to "have one for mum, one for dad and one for the country".^{[27][28][29][30]}

In February 2006, Costello caused controversy during a lecture at the Sydney Institute when questioned about the government's refusal to legally recognise same-sex marriage. He stated, "I think we do recognise the rights of gay and lesbian people in Australia. We do not criminalise [their] conduct or behaviour." He also pointed out that the law was changed in 2004 to recognise same-sex couples with regards to superannuation. He stated that marriage should only be recognised between heterosexual couples.^[31] Also during the same speech, Costello criticised "mushy misguided multiculturalism," warning immigrants that the acceptance of Australian values was "not optional."^[32]

Leadership aspirations

Under Howard

Gordon Brown (left) and Peter Costello (right) at the International Monetary Fund 2002 annual meeting

Costello expected to gain the Liberal leadership some time during Howard's second term as prime minister, as per Howard's alleged December 1994 offer.^[20] When this did not eventuate, it is alleged that Costello became frustrated, particularly when Howard announced, in July 2003, his intention to lead the government into the 2004 election.

During the 2004 election campaign, Howard avoided saying whether he would serve a full term if re-elected, saying only he would remain as long as his party supported him. The government's subsequent success in winning control of the Senate raised further speculation that Howard would delay his retirement, and the prospect of a Costello leadership succession appeared to recede.

In July 2006, the alleged Costello/Howard succession deal was made public by Ian McLachlan. Costello confirmed the incident had occurred and that he shared McLachlan's interpretation of events.^[33] Howard denied the claims repeatedly, stating the continued public drama displayed "hubris and arrogance" and that the leadership was the party room's to decide, not a prize to be handed over by leaders to successors.^[34]

Press Gallery columnist Michelle Grattan described Costello's actions :

Costello doesn't have the numbers to blast John Howard out. But he does have the dirt to make him look bad, and he's throwing it.^[35]

Despite tensions between the Prime Minister and the Treasurer, nothing further came of those events. Neither Howard nor Costello took any action to remove the other from office, or resign. However, on 12 September 2007, amid renewed leadership tensions and a series of unfavourable public polls, Howard confirmed he would step aside well into the next term, if re-elected, and that Costello would be his "logical successor".^[36]

A federal election was held on 24 November 2007. An exit poll of 2,787 voters by Auspoll, commissioned by Sky News, included a question on the statement "I don’t want Peter Costello to become Prime Minister". Fifty-nine per cent agreed, while 41 per cent disagreed.^[37][38] The Coalition lost the election.