Upon assuming office, Howard announced a series of economic measures. Accusing the outgoing government of leaving the country's finances in tatters, he proposed spending cuts of A $8 billion, the sale of the government's 50.4% stake in the Commonwealth Bank of Australia, and the sale of Telstra, the publicly-owned communications company. He also promised action to increase job opportunities and reduce the unemployment rate, which stood at 8%. At the same time, he promised tax rebates for people who use private health insurance, rather than the government health plan, and a new A $1 billion fund to attack environmental problems.
By 1998, Howard's main policy objective was to overhaul Australia's inefficient tax system by cutting income tax rates and imposing a 10% tax on all goods and services, including food. The Labor Party responded with a counter proposal to lower income tax rates for the poor, while taxing luxuries and capital gains. Howard also proposed to sell off the publicly owned telecommunications company, Telstra—a move feared by rural Australians, who worry that private companies might not continue to provide services to the more remote parts of the nation's vast hinterland.
A major factor in the 1998 elections was the rise of the populist One Nation Party. Led by Pauline Hanson, this party has its main power base in the northern state of Queensland. Hanson's party, which advocates stopping all non-white immigration to Australia and ending welfare spending on aboriginal Australians, had won almost a quarter of the vote in Queensland. With this impressive showing, it was thought that One Nation might play a significant role in the 1998 national elections. Hanson predicted that she would end up with enough seats at the national level to hold the balance of power. As it turned out, One Nation took only 8% of the vote in 1998 and just over 4% in 2001 and Hanson lost her own seat in the House of Representatives.
Howard called a constitutional convention in 1998 to reconsider Australia's status as a monarchy. (Queen Elizabeth II of Britain is still the nominal head of state.) Although
Howard is personally opposed to this change, he agreed to allow a national referendum on the subject on 6 November 1999. Although the opinion polls indicated that just under 10% of voters favored retaining the monarch as Australia's head of state, 55% of voters on the referendum rejected a change. At issue is what form the government will become if Australia becomes an independent republic. Voters also rejected a new preamble to the Constitution, written by Howard himself, that would have recognized rights of aborigines (indigenous Australians) for the first time. Howard would like to see constitutional change fade into the background, but the debate over Australia's status as a Commonwealth nation was still heated in 2000. In 2001, Howard was reelected.
During the election campaign of 2001, the government embarked upon a spending spree that left the budget A $3 billion in deficit for 2001/2002. Indexed taxes on petrol were dropped, more money was given to elderly Australians, and cash grants were made to first-home buyers. In addition, more was spent on defense in the wake of 11 September 2001.
In December 2002, Howard unveiled a government advertising campaign entitled "Let's Look Out for Australia" to tell the public how to spot terrorists. The campaign was inspired after a 12 October 2002 car bombing of a nightclub in Bali, Indonesia, that killed 190 tourists, more than half of them Australian. The bombing was attributed to the terrorist group al-Qaeda.
Howard faces a challenging domestic issue in what to do about illegal immigration. In 2001, Australia began detaining asylum seekers in camps while their visa applications were processed. By August 2001, with the numbers of refugees in the camps swelling, Howard ordered Australia closed to refugees seeking asylum and refused to allow a ship carrying 460 refugees (mostly fleeing Afghanistan and Iran) to land. Referring to the asylum seekers, Howard was quoted in the New York Times: "They're not coming to the Australian mainland. That's one choice that is not available." In 2002 Australia began building a processing center for asylum seekers on Christmas Island and pledged A $2.5 billion over the next five years to strengthen Australia's borders and upgrade security within the country. His strong stance on the refugee question was extremely popular among Australian citizens, especially after the attack on the World Trade Center in New York on 11 September 2001. The tiny Pacific Island nation, Nauru, accepted the refugees, housing about 1,200 in a detention camp. Australia promised to provide increased aid to Nauru to A $15 million, an amount that equals 50% of Nauru's GDP. This process was dubbed Howard's "Pacific Solution."