More than $200 million from the of Building Better Regions Fund will be redirected to create a special drought round of funding providing up to $10 million for projects in regional local government areas.
About $140 million will also be paid to the councils through a Roads to Recovery supplementary payment for 128 local government areas in drought for upgrades and maintenance of roads.
The Morrison government has faced fierce criticism from farming groups, the opposition and from within the Coalition over its drought response, with the National Party last month demanding a fresh round of cash injections support struggling regional communities.
The latest announcement comes from recommendations from Coordinator-General for Drought, Major General Stephen Day, who advised federal cabinet that during his consultations concerns were consistently raised about the survival of small businesses in drought-affected towns.
Small businesses dependant on agriculture will be eligible for concessional loans of up to $500,000, with a two-year interest-free period, with interest-only repayments in years three to five.
They will be required to pay interest and principal during years six to 10 of the repayment.
A small business will be defined as a business with 19 employees or less and the loans will be delivered through the Regional Investment Corporation.
“We also know the drought has been tough on small businesses that rely on agriculture,” Mr Morrison said.
“Shearing contractors, harvesters and livestock transport providers have seen their turnover hit, and in many cases struggle to survive. They’ve been forced to seek overdrafts or additional cash flow finance.”
Farming families will be able to restructure their current debt with concessional loan settings at improved terms which match the two years interest free made available to small business.
Farmers who have already accessed the more than $200 million in drought loans approved since 2014 will be able to renegotiate the terms to include the two-year interest free period.
“Interest-free loans will make it cheaper for farmers to buy fodder, transport stock, build water infrastructure, agist cattle, mend fences or refinance existing debt,” Mr Morrison said.
“Farmers will not have to pay a cent for the next two years, and even after that, interest only on a discounted rate.”
Deputy Prime Minister Michael McCormack said communities across Australia were suffering the effects of the prolonged dry spell and the measures would help “ease the burden”.
“This suite of measures go to the heart of what matters to these communities. From small businesses to primary producers, we are working with communities to take the pressure off one of the worst droughts in history,” Mr McCormack said.
Rob Harris is the National Affairs Editor for The Sydney Morning Herald and The Age, based at Parliament House in Canberra