The federal government is gearing up for a fresh battle with the states and territories over disability funding after a Productivity Commission report identified major gaps in service provision, calling for a key agreement to be scrapped and rewritten.

In its report released on Friday afternoon, the commission said the National Disability Agreement "no longer serves its purpose, has a weak influence on policy, and its performance targets show no progress in improving the wellbeing of people with disability."

"A new agreement is needed to promote co-operation, enhance accountability and clarify roles and responsibilities of governments," the report said.

Social Services Minister Paul Fletcher says the states must continue funding disability services. Credit:Paul Braven

The Morrison government was quick to seize upon the report in support of its position that the states must continue to provide health care for people with a disability, regardless of how much funding they have provided to the National Disability Insurance Scheme.