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This paper reviews water policy responses to drought in Australia, focusing on the Murray-Darling Basin (MDB) during the two decades from 1997. This period, which includes the decade long Millennium drought, brought a much sharper focus to discussions of scarcity and value of water. The drought initially focused attention on rising salinity and environmental water availability, as action on both was supported by strong science, and resonated politically. The drought became a crisis in 2006. Short-term planning focused on ensuring communities did not run out of water. For the longer term, the national government responded by announcing a major package of reform measures addressing sustainability and underlying scarcity, and recognising climate change. The package strengthened MDB water market infrastructure, upgraded water resource planning and the ability of irrigators to manage their water assets more flexibly, established new sustainable diversion limits and provided funding to ensure the environment received a larger share of basin water resources. But its completeness as a package can be attributed not only to the severity of drought, but also to political leadership, a disrupting strategy in the form of national legislation and a strong national budget that provided financial resources. The drought provided a crisis, but other ingredients were necessary to ensure effective action. [ABSTRACT FROM AUTHOR]