Droughts have significant environmental and socio‐economic impacts in Australia. This emphasizes Australia's vulnerability to climate variability and limitations of adaptive capacity. Two drought indices are compared for their potential utility in resource management. The Rainfall Deciles‐based Drought Index is a measure of rainfall deficiency while the Soil‐Moisture Deciles‐based Drought Index is a measure of soil‐moisture deficiency attributed to rainfall and potential evaporation. Both indices were used to assess future drought events over Australia under global warming attributed to low and high greenhouse gas emission scenarios (SRES B1 and A1F1 respectively) for 30‐year periods centred on 2030 and 2070. Projected consequential changes in rainfall and potential evaporation were based on results from the CCCma1 and Mk2 climate models, developed by the Canadian Climate Center and the Australian Commonwealth Scientific and Industrial Research Organisation (CSIRO) respectively. A general increase in drought frequency associated with global warming was demonstrated by both indices for both climate models, except for the western part of Australia. Increases in the frequency of soil‐moisture‐based droughts are greater than increases in meteorological drought frequency. By 2030, soil‐moisture‐based drought frequency increases 20–40% over most of Australia with respect to 1975–2004 and up to 80% over the Indian Ocean and southeast coast catchments by 2070. Such increases in drought frequency would have major implications for natural resource management, water security planning, water demand management strategies, and drought relief payments. Copyright © 2007 Royal Meteorological Society