Australia's poor report card should be the trigger for turning around our education system. Illustration: Matt Davidson. Australia's dose could be a good thing, because there's precedent for a turnaround after it hits. Education policymakers have right now an opportunity, and a hard deadline. First, the precedent. When PISA began in 2000, Germany's results stunned the nation.

Illustration: John Shakespeare The economic powerhouse – homeland of Goethe, Heidegger, Hegel and Nietzsche, famous around the world for its engineering acumen and innovation – was performing well below the OECD average. A quarter of its young people were functionally illiterate and innumerate. Deutschland was dismayed. The way schools are currently funded is contributing to inequality. Credit:Janie Barrett The nation's education leaders mobilised, and by 2012 Germany had pushed its PISA results above the OECD average.

There are lessons for Australia in this. Research suggested inequality was the main driver of Germany's poor results, exacerbated by the ghettoisation of migrants. Funding per student was equal, according to OECD education head Andreas Schleicher, but the outcomes were far from it. That is, due to the natural disadvantages some kids have compared with others – if they're learning in a second language or have a disability, for example – a system that aims at equality of outcomes has to provide extra resources to lift up those kids. And with what we will stereotype as ruthlessly Germanic efficiency, Germany turned things around by tackling structural inequalities in the high school system; investing in early childhood education; and closing the equity gap by focusing resources on the most disadvantaged students. Now for the opportunity.

Australia's results in the 2015 PISA and other tests confirmed worrying trends. Real and relative student performance is declining, STEM capability is slipping, inequality is widening. Students from disadvantaged schools on average are three years behind their most advantaged counterparts. Our best students are still among the world's best, but the spread is wider. Inequality is dragging down our PISA results. The way we fund schools is fuelling inequality, rather than mitigating it. For over a decade, money has flowed to the wrong places and policies. That's because we have a school funding system that is a mess of sweetheart deals for special interests and historical curios, unburdened by logic or fairness. There is overfunding of wealthy schools and underfunding of disadvantaged schools.

Without change, $2 billion in taxpayer funds over the next decade will continue to flow to schools that are already technically overfunded. It's not so much a camel designed by committee as an engine assembled in the dark by Amish. It is not working well. But the most comprehensive solution to the problem presented in a generation, the 2011 Review of Funding for Schooling report, known universally as the Gonski review, is potentially just weeks from its political grave. "This is a really critical moment to get funding right," says NSW education minister Adrian Piccoli, who has been among the Gonski system's noisiest champions. "The Gonski report lives and dies in the next three months. We're either as a country going to run with it or we're going to drop it, and ultimately that's going to be a decision made by the Commonwealth."

That's the deadline. The current arrangement expires at the end of this year, so the Prime Minister, premiers and education ministers have just a few short months to come up with a new deal for schools at the April COAG meeting, before the May budget. Right now, we have political gridlock, and no one seems to want to meet in the middle. States including NSW that signed a deal with Julia Gillard's Labor government for six years of additional Gonski money from 2014 are holding out for that original deal. WA says it should get more federal money than it does, and should not be punished for funding its schools better than the other states have.

The federal government, which first tried under Tony Abbott the surprise move of ditching Gonski altogether before backflipping and offering a shrunk-down version in the 2016 budget, says there will be no further money forthcoming. In an added complication, the Commonwealth has signalled it wants to find a new way to carve up the pie, to make up for states like WA and SA getting less federal money per student in the past. If this happened the eastern states would lose up to a billion dollars each over the next four years and it would effectively exacerbate funding inequalities between schools, according to the Grattan Institute's Peter Goss. You can bet the ministers in Queensland, NSW and Victoria are disinclined to sign that deal. The Catholic sector could lose out too, which is why it has been particularly vocal in its irritation with the lack of clarity over funding. The federal government could ignore the states and take a new education plan direct to Parliament, but with Labor, the Greens, Nick Xenophon's independents and Jacqui Lambie expressing their public support for "the full Gonski", they are unlikely to find much joy there.

Without an amenable Senate or a deal with the states, it appears the Gillard-era legislation stands. So the federal government is rather boxed in. Unless they roll over and find the extra money – which they insist is not going to happen – or the states do, we're still at an impasse. The frustration for educators concerned with improving Australia's schools at a systemic level is that politicians of both stripes have hobbled the best chance the country has had at major education reform in a generation. While the politicians have dawdled and squabbled over fixing problems identified six years ago, another generation of kids just finished high school. The Gonski review identified disadvantage and inequity as major drivers of Australia's declining performance in 2011, and laid out an evidence-based, long-term plan to fix it.

It enjoyed consensus support across the school sectors, and from both sides of politics in most states. It didn't have to be preposterously expensive, although some increased funding was required. Then Gillard made the political inoculation of a decision to say "no school would lose a dollar", which made Gonski suddenly a lot more expensive, and the consensus began to crumble. With its allergic reaction to anything proposed by Labor – even the good ideas – the federal Coalition has always been rather lukewarm on tackling inequality in the system. It prefers to talk about other things. Teacher quality, engaging parents and strengthening curriculum all get a lot more emphasis than needs-based funding in its rather slim schools policy document, Quality Schools Quality Outcomes, released around the last budget.

But education minister Simon Birmingham has since reiterated that he wants a needs-based funding model, albeit one with special conditions. So is there a way forward? The Grattan Institute came up with a rather ingenious compromise late last year, which would get all schools to their needs-based funding target by 2023. It does so by lowering the indexation rates for funding increases to a rate closer to actual wage growth. The money freed up gets redistributed, and it doesn't cost any more than the Turnbull government has said it would pay. A handful of over-funded schools would get less money, those in the middle would just have their funding grow slower, particularly disadvantaged schools would see their funds grow much faster. Birmingham, in Parliament, called it "a thoughtful contribution".

Piccoli says it would be moving the goalposts mid-game, and shrinking the quantum of additional Gonski funds from what was agreed. "Gonski laid out a strategy that we're adopting and you need to give it 10 years. We're currently in year four," he says. In Germany, after the 2000 PISA shock, state and federal leaders got together and agreed on a set of common standards and reforms. They stuck with it. It took a decade, but it worked. Here? Well it's one of those Canberra riddles. All three major political parties, along with Nick Xenophon's team, say they want needs-based funding for Australia's school system. So why haven't we got it?