The Grattan Institute report has found students whose parents have low education are particularly disadvantaged.
The damning report comes despite the Federal Government saying education spending is at record levels.
Teachers, parents and pupils dread the annual literacy and numeracy tests that are part of the National Assessment Program, known as NAPLAN.
But a new analysis of NAPLAN data could leave policymakers feeling queasy, too.
A Grattan Institute report says learning gaps between students of different backgrounds are alarmingly wide.
A co-author of the report, Dr Peter Goss, says some Year 9 students are up to seven years behind their peers.
"When we look at the progress of students, using NAPLAN data, we find that gaps open up between students by Year 3 but they get very much wider by Year 9. There's two types of reasons why those gaps open up. Students who start behind fall much further behind, so that, by Year 9, the top students in a class might be up to seven years ahead of where the bottom students are. The second finding was about the link between progress in school and student background, that students whose parents don't have those high levels of education fall a long way behind those peers whose parents have a degree, even from the same starting point in Year 3, and that's really alarming."
The analysis also shows bright students in disadvantaged schools make two-and-a-half years less progress than students with similar capabilities in more advantaged schools.
Students in rural and remote areas are disadvantaged compared with inner-city students, with city students up to two years in front of those in the country.
University of Sydney early-education expert Shirley Koch says the report's findings are a signal policymakers need to take action.
"It's pretty clear that it really helps if you live somewhere in a city and you go to a school that has all the bells and whistles,* and that, in itself, is really awful, because it shouldn't matter where they are educated, they should achieve well. But right at the moment, there is this gap, and that is really, truly awful. But for me, the first thing I looked at was the statement that said bright children are being disadvantaged by up to two-and-a-half years, and that, to me, was the red flag.** And I thought, 'Oh, goodness, how can we remedy this? What can we do right now to make a difference?'"
Instead of using NAPLAN scores to measure students' progress, the report establishes a new, time-based measure in years.
Dr Goss says the new method is more useful to policymakers.
"It took us about six months of work to develop what was quite a new approach to analysing the data and then to pull together the findings. Now that we've got this new approach, and we've tested it with a range of experts, we think that we can do -- and other people can do -- similar types of analysis much more easily, and the results are much easier for policymakers and interested people to understand."
Education and Training Minister Simon Birmingham says in a statement his department welcomes the report.
But in the statement, he has not outlined a response to its recommendations.
"The Grattan Institute's report highlights the need to focus education-reform conversations on how to lift standards, not a simplistic debate about how much we spend. This report and our slipping OECD rankings have come about despite funding growth in education of 100 per cent in real terms between 1988 and 2012."
The report recommends the NAPLAN national minimum standard is too low to identify what it calls "stragglers."
It says that standard should be raised or removed entirely in favour of lifting the bar to focus on proficiency.
The report also suggests education-system leaders must ensure good value from education spending.
Dr Goss says policymakers should use the report's findings to strengthen targeted teaching and support policies, particularly for disadvantaged students.
"The first thing is that, really, understanding these gaps and rates of progress should be front and centre of our education discussions. NAPLAN is an incredibly powerful tool for doing that, especially with our new way of interpreting the data. And that, in turn, should link into the resource-allocation decisions we make: Are we putting our resources in the places that will make the most difference and using them in ways that are going to work?"
