MICHAEL KEATING. Drought Assistance: Is it efficient? Is it fair?

Oct 9, 2019

Australia is currently experiencing a severe drought; possibly the most severe on record. Not surprisingly there have been calls for governments to do more. Some have even claimed that Australia lacks a proper drought policy. This article discusses the key features of an ideal drought policy, and what are the respective responsibilities of those being assisted – mainly farmers – and governments that are the principal source of any assistance.

The starting point for any consideration of drought policy in Australia, must be a recognition that drought is an endemic feature of Australian agriculture. The possibility of recurring droughts must therefore be planned for and not just treated as bad luck, for which farmers themselves bear no responsibility. Furthermore, the advent of climate change means that we can expect droughts to become even more frequent in future, and this alone should prompt a review of farming practices.

The reality is that seasonal conditions have always varied enormously in Australia. Farmers should have the primary responsibility for managing their farms so that they can survive most of these seasonal variations. This is no more or less than is expected of producers in any other industry. Also, other producers would be expected to insure against hazards that they cannot absorb themselves, such as floods or fires.

But if it is believed that somehow insurance against bad droughts is too expensive for farmers and that government assistance is warranted, then I submit that conditions under which this assistance should be very tightly specified in advance, and then enforced. I don’t think this is the case at present. Indeed, the last time that drought assistance was properly administered was by the Hawke-Keating Governments when the late Senator Peter Walsh was Finance Minister. Walsh was a Western Australian wheat farmer, and he knew quite a lot about droughts. Under his guidance, drought assistance was limited to “exceptional circumstances”, and these were tightly defined so that they rarely occurred.

My second point flows from the first, and that is that the too-ready availability of drought assistance helps create droughts. This is because farmers tend to base their production plans on what they consider approximates a normal year. The too-ready availability of drought assistance reduces the risks associated with a bad year, and thus encourages over-cropping and over-grazing. If farmers know that their mistakes will be bailed out, then they have an additional incentive to maintain their herds even when the risk of not having enough feed is quite high. They anticipate that the taxpayer will bail them out if it doesn’t rain, and that they will be able to buy-in the additional (subsidised) fodder when they might need it.

For example, earlier this year farmers engaged in fattening cattle could have sold their cattle before the drought became really severe at a reasonable price. However, some decided to gamble that it would rain. Despite the risks, these famers gambled that the crops they had planted to give their cattle extra feed through the winter would mature, and they would get an even better price for their beasts by selling later. As it happened it didn’t rain, their crops to provide the additional feed all withered, and they are now facing selling their stock off in terrible condition, at rock-bottom prices. These farmers will typically get some relief from the government, but if they had thought that the government would not bail them out in this way, I strongly suspect that they wouldn’t have run the risk of over-stocking their properties in this way in the first place.

What also concerns me is that if someone investing in another industry lost a lot of money, no-one would think that they were deserving of assistance from the government. But in both cases, the decision represented a gamble against a risk. The only difference is that farmers expect their gambles to be bailed out whenever they fail, whereas for the rest of us we have to take responsibility for our own decisions and their consequences.

Third, I note that a common reaction to this drought is to criticise governments for not building more dams. For example, Tony Walker in last Saturday’s SMH, states that ‘since 2003, just 20 larger capacity dams have been built, 16 in Tasmania’. Similarly the Commonwealth Minister, David Littleproud has been calling on the States to build more dams, and has castigated the Premier of Victoria, Daniel Andrews, for his observation that building more dams will not make it rain. The truth is that the principal areas affected by this drought form part of the Murray-Darling river basin, and with the Murray River struggling to reach the sea in most years, we don’t need more dams to further reduce the river flows. Instead, we need to buy the water back from marginal irrigators, who would willingly like to sell, and quit the industry.

For my part, therefore, I am glad that only 4 dams have been built on the mainland since 2003. I bet none of these dams were economically justified, in which case we are better off as a nation limiting dam building.

The truth is that to the best of my knowledge there isn’t a single example of an irrigation scheme in Australia’s history where the water charges have ever recovered all of the irrigators’ share of costs. Even the Snowy Scheme, which has paid for itself, did not seek to recover its costs from the irrigators, who for decades got their water for nothing. Instead, the cost of the Snowy Scheme has been largely recovered through the charges levied for its electricity.

Nevertheless, there was a relatively brief couple of decades, where under the competition policy rules agreed by COAG in the early 1990s it was agreed that irrigation water prices would be set to recover the cost of all new investment, but no attempt was ever made to impose that form of market discipline retrospectively to recover the cost of the existing irrigation capital stock. Furthermore, as might have been expected, even this form of market discipline on future irrigation investment broke down once the National Party got hold of the water portfolio under Barnaby Joyce, and a Liberal-National Party Government was returned in NSW.

There is no other industry, however, that gets the cost of its basic inputs subsidised by the taxpayer in this way. The rest of us pay the full price for our power, fuel and light, and all other inputs. The consumers of urban water pay the full cost of their water, with prices now set to recover the cost of the more expensive de-salination plants that are now needed to supply sufficient water in a drought. No wonder water is scarce in a dry continent when the farmers do not even pay the cost of providing it.

Thus, to sum up my argument so far:

1. The main responsibility for drought proofing their farms should lie with the farmers, and drought assistance should only be available in “exceptional circumstances” that are tightly specified in advance and then enforced,

2. I don’t think we should be building more dams unless they are economically justified, and on the past record that is extremely unlikely.

In addition, given the impact of climate change, I think we need to be prepared to reassess where more-intensive farming is viable, and in that context, what constitutes a drought, and what is only a “new normal”. Some farms may have to consolidate further so that the land is farmed less intensively, given the fall and/or increased variability in the average rainfall. This would of course mean tightening the definition of what constitutes the exceptional circumstances that would constitute a drought in future. It would probably mean some farmers quitting the industry, and this may require some form of government assistance to help them make the adjustment and find alternative employment. This may sound tough, but numerous other employees have similarly lost their jobs because of structural changes beyond their control.

Indeed, what gets me is how farmers in this country are always seen as somehow more deserving of what can only be described as charity. At the same time, many of their supporters are complicit in the meanness that now limits assistance to unemployed people and other disadvantaged citizens. For example, the Minister for Social Security was recently reported as saying that she thought it would be a waste of money giving more assistance to welfare recipients as it would only flow on to drug dealers and pubs. However, the vast majority of unemployed people are unemployed through no fault of their own – rather the structural changes that led to their losing their jobs were imposed upon them, which then enabled the rest of us to live better. On the other hand, as I have shown above, a key reason why many farmers lose money in drought years is because they gambled on the weather and did not take sufficient precautions to store fodder and/or reduce the size of their herds. In other words. they are largely responsible for their predicament, whereas unemployed people mostly are not.

Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.

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