Income contingent loans for drought relief: delivering better outcomes for farmers and taxpayers

• Bruce Chapman, Linda C. Botterill
• Centre for Economics Policy Research

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12 February 2009Australia’s National Drought Policy is considered to be one of the most advanced in the world, recognising as it does the reality of climate and focusing on adapting farm
management to climatic uncertainty rather than simply subsidising agriculture in low rainfall areas. But while the underlying principles of the Policy seem to be sound,
after nearly two decades of implementation and incremental changes to the instruments applied under the policy have resulted in the loss of the risk management
message, ongoing use of the exceptional circumstances provisions and growing inequities between farmers, and between farmers and non-farmers. In this paper the authors argue that the objectives of the Policy need to be reaffirmed and key policy changes made to ensure the outcomes of the policy more closely align with its intentions. The authors analyse financing policy issues and propose the introduction of an income contingent loan (ICL) for drought relief as an equitable and efficient policy instrument for delivering relief to farm businesses experiencing drought, and perhaps for other adverse circumstances. It is argued that such a policy reform would allow farm businesses to take advantage of ICL insurance benefits associated with default protection and income smoothing, while at the same time minimising taxpayer contributions to drought relief.