The federal government should consider extending its universal early childhood education policy to include three-year-olds, the Organisation for Economic Cooperation and Development (OECD) recommends.
The OECD also suggests performance pay salaries for teachers and extending HECS to include living costs.
In a report comparing education funding and performance outcomes of member nations, the OECD found early childhood education, teacher supply and education outcomes for disadvantaged kids in Australia were lagging behind other nations.
Spending on early childhood education in Australia is about 0.1 per cent of gross domestic product (GDP) compared to the OECD average of 0.5 per cent.
About 40 per cent of three- and four-year-olds participated in early childhood programs, compared with the OECD average of 70 per cent.
Indigenous children and those from non-English-speaking backgrounds, and disadvantaged areas, were "significantly" under-represented in the sector, the report found.
There was "considerable room" to improve the pre-school and childcare sector, particularly in disadvantaged areas.
"Participation in pre-primary programs remains low, as does government spending on such services. Many disadvantaged children miss out," it said.
Labor's policy to introduce universal childcare to all four-year-olds could be extended to three-year-olds and the duration of service provided should be more than 15 hours a week, it said.
The report described as "weak" the salaries of Australian teachers when compared with teachers in other OECD countries.
The career progression system for teachers in Australia was acting as a disincentive for graduates to enter the workforce.
Under the pay system a teacher will reach the top salary band nine years after graduation.
The OECD recommended a system where incentives were given to high-quality teachers, especially in schools in areas of disadvantage.
"Strategies to reward and recognise teaching will form part of a collaborative approach to strengthen the profession," it said.
School principals should also be given more autonomy to recruit and maintain high-quality teachers.
Affordability and participation in the higher education and university sectors is another area where Australia lags behind.
Tuition fees for domestic students in Australia is among the highest in the OECD, the report says.
A sharp decline in public expenditure has also led to inflated university fees, declining teacher-student ratios and increased student debt.
The report recommends the government boost expenditure and expand the HECS support scheme to include living expenses to encourage more students from disadvantaged areas.
