A new report shows Australian students are not performing as well as they used to compared to their international peers.

The annual progress report for the Council of Australian Governments (COAG) says despite some improvements having been made in literacy and numeracy in schools, students are slipping behind internationally, especially in comparison with China.

The report says more Australians are among the lowest-performing students internationally, while fewer are top performers.

The proportion of students performing at the highest levels in reading (level 5 or above) decreased from 17.6 per cent in 2000 to 12.8 per cent in 2009.

In 2009, Shanghai had 19.5 per cent of its students at level 5 or above, while just 4.1 per cent were at level 1 or below.

Australia had 14.2 per cent of its students at level 1 or below, compared with about 13 per cent in 2000.

In maths, the proportion of Australian students performing at level 5 or above decreased from 19.9 per cent in 2003 to 16.5 per cent in 2009.

The chief executive of the Grattan Institute, John Daley, says evidence of the falling grades of Australian students should act as a "wake-up call".

Mr Daley says international evidence suggests the quality of a school education system is one of the most important drivers of economic success.

"We have more people in the bottom quintile and we have fewer people in the top quintile than we did nine years ago and that's a real issue given how important education is both to our economy, to people's well-being and to social equality," he said.

"That's quite a drop, it's something that we think we should be really worried about."

The top three performing countries in reading literacy in 2009 were China, New Zealand and Singapore.

Australia was performing well above the OECD average in both reading literacy and maths.