Born in Melbourne, Reith was educated at Brighton Grammar School and at Monash University, from which he obtained bachelor's degrees in economics and law. He then practised as a solicitor first in Melbourne and then at Cowes, a small town on Phillip Island. First elected as a Councillor of the Shire of Phillip Island from 1976, he was Shire President in his last year on the Council in 1981.
While living on Phillip Island Reith was behind the establishment of Newhaven College, an independent school on Phillip Island. He was also the key proponent for the establishment of the penguin research facility.
Reith joined the Liberal Party in 1966. Representing that party, he entered the House of Representatives in December 1982 by winning a by-election for the seat of Flinders, caused by the resignation of former Deputy Liberal Leader Sir Phillip Lynch.
Reith did not attend Parliament to be sworn in when he had the chance, and lost the seat only three months later at the March 1983 general election. He regained the seat at the December 1984 election, which saw a substantial swing towards the Liberals (though not enough to win them government), and he continued to hold the seat for the next 17 years.
Except for a few months in 1993, Reith was a shadow minister from 1987 until 1996. His posts included Shadow Minister for Housing, Shadow Minister for Sport and Recreation, and then Shadow Attorney-General in 1988. In the latter capacity, he led the successful "no" campaign at the 1988 constitutional referendum.
He was also Shadow Minister for Defence and Shadow Minister for Foreign Affairs. After the defeat of the Liberal Party led by Andrew Peacock at the 1990 federal election, and Peacock's subsequent resignation from the leadership, Reith sought the leadership himself, but was defeated by John Hewson, who won by 62 votes to 13.
Reith was then elected deputy opposition leader and appointed Shadow Treasurer, a position he held from 1990 to 1993. Along with Hewson, Reith was one of the architects of the Liberal Party's "Fightback!" policy, which included a Goods and Services Tax. He resigned as Shadow Treasurer after the Liberals were defeated in the 1993 election. He lost the deputy Liberal leadership in the post-election ballot, and was replaced by Michael Wooldridge.
Despite the fact that Reith was the incumbent deputy leader, he had five challengers to his position, including Wooldridge, and Reith did not win enough votes to make to it to the final ballot. Following the landslide victory of John Howard at the 1996 election, Reith became Minister for Industrial Relations, and Leader of the House. He was one of the best-known and most influential members of Howard's cabinet. His responsibilities involved drafting and implementing the government's industrial relations policy, and he is perhaps best known for the significant productivity reforms which followed the 1998 Australian waterfront dispute. Reith's handling of the dispute, in which he strongly supported Patrick Corporation in its contest with the Maritime Union of Australia, led to bitter opposition from the unions and the Australian Labor Party (ALP).
Reith also introduced and implemented reforms to the Commonwealth public service, a significant package of reforms for small business, and an innovative employment programme for indigenous Australians.
In 2000, Reith was embroiled in an investigation over the use of his phone card, which had incurred charges totalling A$50,000. He admitted that about $1,000 of phone calls were the result of his son's access to the PIN associated with the card.
During the campaign for the Australian republic referendum in 1999, Reith advocated for Australia becoming a republic, and favoured the idea of the president being directly elected. During his time in government, he also supported the idea of citizen-initiated referenda.
Howard transferred Reith to the Defence portfolio in 2000. The following year, Reith announced his impending retirement, and did not contest the 2001 election. Late in the election campaign he became embroiled in the "Children Overboard affair", in which the government made claims that asylum seekers had thrown children overboard in a ploy to secure passage to Australia, and failed to correct the record when advised there was no evidence for the claims.
Reith defended his actions, and made public statements about the matter in the documentary series The Howard Years, which screened in Australia in November and December 2008, in Leaky Boat in July 2011, and in the 2012 Logie Award-winning documentary Go Back to Where You Came From. Reith was succeeded as MP for Flinders by fellow Liberal Greg Hunt, and as Minister of Defence by Senator Robert Hill.
After leaving parliament, Reith had a number of part-time interests, including advising a Sydney government relations firm, Tenix, a major defence supplier and others. From 2003 to 2009 he was an executive director of the European Bank for Reconstruction and Development (based in London); in this capacity he represented Australia, the Republic of Korea, Egypt and New Zealand. While in London, Reith was also a member of an independent commission that reported to the Cameron Opposition on UK tax reform.
During 2011, after writing a report for the Liberal Party on the 2010 election, Reith challenged Alan Stockdale (who in the 1990s had been State Treasurer of Victoria) for the presidency of the Liberal Party. In that contest, Reith lost to Stockdale by just one vote: 56 to 57. Liberal leader Tony Abbott effectively made his vote for Stockdale public, when he was recorded on camera showing his vote to Stockdale. In 2013 Reith was Chairman of the Victorian Gas Market Review which concluded with the presentation of his report to the Napthine Government.
From 2014 Reith has been writing weekly for The Sydney Morning Herald and is a political commentator for Sky News Australia, appearing regularly on AM Agenda and The Cabinet. Reith began co-hosting a temporary format with Peter Beattie in April 2016 as a replacement for Richo while that program's host Graham Richardson was on leave to have major surgery.
In April 2016, Peter Reith registered as a political lobbyist in South Australia. He represents two clients in that jurisdiction: Bechtel Infrastructure Australia (Pty Ltd) and G4S Custodial Services Pty Ltd.
In March 2017, Reith was hospitalised after suspected bleeding on the brain.