Watson grew up on a farm in Gippsland, took his undergraduate degree at La Trobe University and a Ph.D at Monash University and was for ten years an academic historian. He wrote three books on Australian history before turning his hand to TV and the stage. For several years he combined writing political satire for the actor Max Gillies with political speeches for the former Premier of Victoria, John Cain.

In 1992 he became Prime Minister Paul Keating's speech-writer and adviser and his best-selling account of those years, Recollections of a Bleeding Heart': Paul Keating Prime Minister, won both the The Age Book of the Year and non-fiction Prizes, the Brisbane Courier Mail Book of the Year, the National Biography Award and the Australian Literary Studies Association's Book of the Year.

In addition to regular books, articles and essays, in recent years he has also written feature films, including The Man Who Sued God, starring Billy Connolly and Judy Davis. His 2001 Quarterly Essay Rabbit Syndrome: Australia and America won the inaugural Alfred Deakin Prize in the Victorian Premier's Literary Awards. Death Sentence, his book about the decay of public language, was also a best seller and won the Australian Booksellers Association Book of the Year. Watson's Dictionary of Weasel Words was published in 2004 and continued to encourage readers to renounce what he perceives to be meaningless corporate and government jargon that is spreading throughout Australia and embrace meaningful, precise language. More recently Watson contributed the preface to a selection of Mark Twain's writings, The Wayward Tourist.

His latest book, American Journeys is a narrative of modern America from Watson's travels in the United States following Hurricane Katrina. It was published by Knopf in 2008 and won both the The Age Book of the Year non-fiction and Book of the Year awards.[4]. It also won the 2008 Walkley Award for the best non-fiction book.