AbstractCurrent methods for climate change assessment ignore the significant differences in uncertainty in model projections of the two key constituents of drought, precipitation, and evapotranspiration. We present here a new basis for assessing future drought using climate model simulations that addresses this limitation. The new method estimates the Standardized Precipitation Evapotranspiration Index (SPEI) in a two‐stage process. The first stage of our proposed approach is to derive the Standardized Precipitation Index (SPI) using reliable atmospheric variables, which are filtered with a wavelet‐based spectral transformation. This derived SPI is then converted to an equivalent SPEI by combining it with climate model evapotranspiration simulations. We assess the performance of our proposed approach across Australia. The consistency of general circulation model (GCM) drought projections, in terms of both frequency and severity, is improved using the derived SPI. Incorporating evapotranspiration further improves the consistency of the multiple GCMs and drought time scales. The proposed framework can also be generalized to other water resources applications, where the differences in GCM uncertainty for precipitation and evapotranspiration affect climate change impact assessments.