The move by the Abbott Government to provide $320m to farmers experiencing drought is terrible, not merely inconsistent, economic policy. The move undoes 5 years of reforms to drought assistance arrangements initiated by previous governments although the Gillard Government did some equally daft things. Australia experiences regular “droughts” as a part of its normal climate. It is essential that farmers come to internalise this fact particularly given that, with climate change, we can expect more droughts and more severe droughts. Most of the $320 million is in the form of low interest loans which have the moral hazard consequence of reducing the incentives of farmers to prepare for drought. It also discourages de-stocking in the face of drought which has adverse environmental consequences.
In its report on drought assistance the Productivity Commission recommended abandoning all drought assistance or (if assistance was to be retained) tightening the “exceptional circumstances” motivation for it. I agree.