Summary of review findings

​Summary of findings on the EC Interest Rate Subsidy of previous drought policy reviews

Matthews, K., Olson, N., File, G., Lawson, R., Kuhl, B., Davies, B., Moore, K., Gunthorpe, J. and Hood, C. 1997, Review of the National Drought Policy, Drought Policy Task Force, Canberra

  • Found that "RAS [Rural Adjustment Scheme] exceptional circumstances interest rate subsidies were poorly utilised and targeted to farmers for whom the finance sector could adequately cater. Other problems were that they tend to encourage higher debt levels and can be capitalised into land and livestock prices, thereby retarding structural adjustment" (pg. 4)
  • Recognised that the "removal of subsidies such as EC interest rate subsidies would have a positive environmental effect by not contributing to the maintenance of normal production activities in times of drought" (pg. 34–35) 
  • Concluded that "interest rate subsidies are not needed to encourage commercial lenders to support long term viable farmers through droughts. The funding used for interest rate subsidies could be redirected into a range of drought preparedness or environmental measures such as education, farm planning and / or savings subsidies, rather than debt." (pg. 51)
  • Concluded that "Although many farmers accessed interest rate subsidies on debt, they were ineffective in meeting the objectives of the National Drought Policy (self reliance), inequitable in the provision of the funding (the "lines on a map" problem) and were targeted at farmers likely to have other sources of finance." (pg. 51)
  • Recommended "That exceptional drought circumstances interest rate subsidies be terminated as soon as current EC declarations are removed, and the funds be redirected towards drought preparedness measures." (pg. 51)

McColl, J., Donald, C. and Shearer, C. 1997, Rural Adjustment — Managing Change, Department of Primary Industries and Energy, Canberra

  • Found that "Exceptional circumstances interest rate subsidies discriminate against farmers without debt or who take steps through off-farm investments and income to prepare for drought." (pg. 50)
  • Found that "Interest rate subsidies encourage debt over other forms of financing. Furthermore, they are discriminatory in that they give an unjustifiable competitive advantage to recipient farmers over non-recipient farmers, particularly those who use off-farm income as a risk management strategy and are therefore ineligible for the subsidy." (pg. 90)
  • Concluded that "The use of interest rate subsidies under the RAS [Rural Adjustment Scheme] exceptional circumstances provisions is not consistent with the objective of self-reliance." (pg. 113)
  • Recommended that "Future government programs to address rural adjustment should no longer use interest rate subsidies or grants to farm businesses for productivity improvement or for exceptional circumstances support." (pg. 119)

Drought Review Panel 2004, Consultations on National Drought Policy – Preparing for the Future, Department of Agriculture, Fisheries and Forestry, Canberra

  • Found that "Overall, stakeholders considered these types of assistance measures [the Exceptional Circumstances Interest Rate Subsidy and transport/fodder subsidies] encouraged debt and supported the less prepared producer." (pg. 2)
  • Considered that "The emphasis in future policy should shift strongly towards assisting drought preparedness (and away from direct business support during a drought event), whilst maintaining or possibly increasing access to welfare support." (pg. 6)

Agriculture and Food Policy Reference Group 2006, Creating our Future: Agriculture and Food Policy for the Next Generation, ABARE, Canberra

Report: Creating our future agriculture and food policy for the next generation

  • Found that "Measures such as improved training and education and Farm Management Deposits are more effective than interest rate or transaction subsidies in encouraging risk management and preparedness for exceptional circumstances." (pg. 30)
  • Found that "Many see it [Exceptional Circumstances Interest Rate Subsidies] as rewarding poor management, propping up farmers who fail to respond to changed business conditions or take imprudent risks. It can delay change and reform by keeping otherwise unviable farms in business for longer than would otherwise be the case." (pg. 188)
  • Recommended "introducing new and improved measures to develop better farm preparedness (including risk management strategies) to deal with market fluctuations and climatic extremes, while phasing out interest rate and other transaction based subsidies by the end of 2010." (pg. 189)

Productivity Commission 2009, Government Drought Support, Report No. 46, Final Inquiry Report, Melbourne

View the drought report

  • Found that the "ECIRS creates a number of perverse incentives and unintended outcomes which are likely to reduce the effectiveness of the program." (pg. 152)
    • "As the program provides the most assistance to those with the largest debt, there is an incentive for some to build debt and/or not reduce debt when faced with drought risk as governments have a history of stepping in and subsidising its cost (having financial reserves and a lower debt to equity ratio can be an important hedge against drought risks)." (pg. 152)
    • "Recipients may be less responsive to drought conditions as financial assistance increases the potential to spend money on additional variable inputs (such as fodder) to maintain production levels" and that "This may have unintended consequences for the long term condition of natural resources." (pg. 153)
    • "There may be a disincentive to diversify income sources off-farm." (pg. 153)
    • "As with any subsidy on production, interest subsidies can become capitalised into asset values and thereby penalise non-assisted farmers and new farmers who wish to purchase capital inputs."1 (pg. 153)
    • "Interest subsidies represent a windfall gain to farms receiving the subsidy and provide an unjustifiable competitive advantage to recipient farmers over non recipient farmers."  (pg.153)
  • Concluded that "Interest rate subsidies are inappropriate, ineffective and inefficient. They focus support onto those farms and businesses in EC areas that, on average, have high levels of debt, low levels of liquid assets and low off-farm income." (pg. 154)
  • Recommended that "Exceptional Circumstances interest rate subsidies should be terminated, subject to transition arrangements." (pg. 154)

Kenny, P., Knight, S., Peter, M., Stehlik, D., Wakelin, B., West, S. and Young, L. 2008, It's About People: Changing Perspectives On Dryness. A Report to Government by an Expert Social Panel on Dryness, Commonwealth of Australia

Report: It's About People: Changing Perspectives On Dryness. A Report to Government by an Expert Social Panel on Dryness, Commonwealth of Australia

  • Found that "For all the [drought] assistance provided, farm families, rural businesses and communities currently living with dryness in rural Australia do not feel or perceive they are measurably better off." (pg. 2)
  • Found that "Rather than providing incentives in times of difficulty to counteract the worst effects of dryness, governments should invest in providing incentives in better times to encourage commercially and environmentally responsible management under variable seasonal conditions." (pg. 10)
  • Found that "Future policy should better focus on encouraging farm families, rural businesses and communities to be prepared for future dryness." (pg. 18)

Keogh, M., Granger, R. and Middleton, S. 2011, Drought Pilot Review Panel: a review of the pilot of drought reform measures in Western Australia, Canberra, September

Report:  Drought Pilot Review Panel: a review of the pilot of drought reform measures in Western Australia, Canberra, September

  • Considered that "most of the activities funded with Business Adaptation Grants are unlikely to help farm businesses better prepare for future challenges such as drought, climate variability and reduced water availability." (pg. 2)
  • Recommended "Any future investment to assist farm businesses to become more resilient should be better targeted at activities that deliver lasting benefits that help farmers to better manage and prepare for future challenges like drought, climate variability and reduced water availability." (pg. 49)

1 The Productivity Commission referenced this statement from: Milham, N. and Davenport, S. 1997, A Review of Developments in Rural Adjustment and Welfare Policy, paper presented at the 41st annual conference of the Australian Agricultural and Resource Economics Society, Gold Coast, 22-24 January