Australia's education sector has become a two-tier system of advantage and disadvantage, the Gonski review into schools funding shows.

The report argues that $5 billion in annual recurrent funding is needed to address the trend, which report author David Gonski cautioned was calculated in 2009 terms - meaning it would be higher today.

''Importantly the report says that differences in educational outcomes must not be the result of differences in wealth, income, power or possessions,'' Mr Gonski said, releasing the report.

''There is growing evidence that an increased concentration of disadvantaged students in a school has an impact on education outcomes.''

In the past 10 years, Australian children have slipped from being equal second in reading among OECD countries to being equal seventh. They have slipped from equal fifth to equal 13th in maths.

But the report also showed that disadvantaged children were underperforming at schools to a greater degree than children from privileged backgrounds, and were more likely to earn low incomes as adults.

In 2009 the median weekly income for adults whose highest level of education was year 10 or below was $671. For those with a graduate diploma, it was $1438.

''There is also an unacceptable link between low levels of achievement and educational disadvantage, particularly among students from low socio-economic and indigenous backgrounds,'' the report found.

It showed the effect of disadvantage on students' opportunities, with 60 per cent of children who are not proficient in English, and about 30 per cent of indigenous children considered ''developmentally vulnerable''.

In 2009, 56 per cent of children from low socio-economic backgrounds completed year 12, compared with 75 per cent of children from high socio-economic backgrounds.

Almost 80 per cent of students in the lowest quarter of socio-economic disadvantage attend state schools, compared with 15 per cent who go to Catholic schools, and 6 per cent who go to independent schools.

In both NAPLAN and PISA (the Program for International Student Assessment, used by the OECD) measures, children from independent schools tended to have better results, followed by children from the Catholic sector and then government schools.

But in its four-page response to the review, the government raised doubts about the call for additional funding, saying ''in some areas, the Australian government believes that the scope of proposed new funding contributions may be too large''.

And it highlighted its intent to bring the budget back into surplus by 2012-13.

The Prime Minister, Julia Gillard, told journalists she was determined to make the ''right budget choices'', which would ''enable us to have our economic settings right as well as to fund the things that are most valuable to our community''.

''I'd say to you, for us as a government it's not an either/or equation between a budget surplus or funding the things that you believe in. It's about making the two work together,'' Ms Gillard said.

Gonski Report Recommends $5 Billion For Schools