Drought assistance is repeating the mistakes of the past by creating “perverse incentives” for farmers and is “out of step” with income support given to other struggling families, the Productivity Commission has warned.

In its annual trade assistance review, released on Wednesday, the commission also warned the proliferation of government finance facilities – including for small business and the Pacific – imposes a risk on taxpayers the federal government has failed to disclose.

The review notes rising protectionist sentiment around the world – with tariffs imposed by the United States on steel and aluminium prompting retaliation from China – and suggests Australia should respond by maintaining low barriers to trade and investment.

While government assistance has fallen in most industries, the Productivity Commission noted it had risen in primary production industries due to “numerous drought assistance measures” including payments of $12,000 per household and bigger concessional loans.

The commission noted it has not reviewed drought programs since 2009, when it found they “acted like implicit insurance (without requiring a premium) and potentially altered the behaviour of some farmers”.

It noted that new federal government-funded loan schemes have been introduced despite the earlier finding that concessional loans “created a number of perverse incentives and unintended outcomes that made it ineffective in achieving its stated objective of building farmers’ self-reliance to manage climate variability and preparedness for droughts”.

The schemes gave farmers an incentive to build or not reduce debt, not to diversify income sources off-farm, and provided a windfall gain and competitive advantage against other businesses, it said.

The commission said the government has extended cash grants “out of step with income support available to other Australians”, suggesting they are now “better thought of as industry assistance”.

Cash grants and state schemes to pay for fodder “reduce the incentives for farmers to manage their properties well over climatic cycles and may also reduce the incentives to de-stock during periods of drought”, it said.

The Productivity Commission noted since its last annual review the federal government has created a $2bn Australian Business Securitisation Fund to lower the costs of small business borrowing and a $1bn infrastructure lending facility for Pacific Island nations.

“While individual schemes may, or may not, be worthwhile, they all impose additional risk on the Australian taxpayer that has generally not been made clear,” it said.

Government finance vehicles do not hit the federal budget’s bottom line and may therefore “in some cases, lower scrutiny of spending decisions”.

In August 2018 – just months before the government announced the new small business facility – the commission found that nearly 90% of small to medium enterprises that applied for loans were successful.

The Productivity Commission called for further reviews of both drought assistance and new government financing measures.

It called on the government to explain “why financing is the best policy option” and to demonstrate that the schemes “genuinely make Australians better off, and that they do not merely benefit project proponents”.

The Productivity Commission chairman, Michael Brennan, noted that around the world “we are seeing the language of market gain give way to the language of strategic rivalry, resulting in unpredictable trade policy”.

“This is bad for business and bad for jobs,” he said.

The review attributed the “fundamental shift” in US trade policy due to Donald Trump’s presidency, noting his “bravado” has been backed by pulling the US out of the Trans-Pacific Partnership and imposing steel and aluminium tariffs, from which Australia is exempted.

“Despite high-profile tensions between our trading partners, Australia has progressed a number of multilateral, regional and bilateral trade agreements,” the review said. “Yet domestic policy has continued to retreat into protectionism in some areas. Australia has one of the world’s most active ‘anti-dumping’ regimes, for example.”

In total, Australian industry received more than $14bn in assistance from the Australian government in 2017-18, made up of tax concessions ($7.3bn), budgetary assistance ($4.8bn) and tariffs ($2.3bn).