The Productivity Commission says schools should spend about a billion dollars employing “mental health and wellbeing” counsellors for children.

The latest Productivity Commission report warns mental illness and suicide is costing the country an estimated $500 million per day.

The draft report documents long-standing problems in the system, including “persistent wasteful overlaps and yawning gaps in service provision” when it comes to mental health in schools.

“Substantial reform of Australia's mental health system is needed and there is no quick fix,” the report states.

Chairman Michael Brennan said: “Mental health remains one of the most significant policy challenges we face”.

“It is an important health issue, an important broad social policy issue, but it is an economic policy issue as well; it has very significant economic costs which we estimate to be $180 billion per year.

“But that really represents what underlies that is pain felt by individuals and families who are spending years in mental ill health and not necessarily having services they need available to them.”

The report recommends all primary and high schools have a full-time staff member responsible for “mental health and wellbeing”.

The report said a similar approach is being rolled out across UK schools, and has shown some early signs of success.

The cost of such a measure is estimated to be up to $975 million each year for both public and private schools.

Service providers are typically funded on an annual basis, and the report recommends state, territory and federal governments extend that to a minimum of five years.

“I think it is fundamentally important that service providers have a degree of certainty when they're contracted to government, and aren't burdened by red tape,” Mr Brennan said.

“We need to ensure people are getting on with delivering service on the ground to people who need it,” he added.

It also calls for the Commonwealth, states and territories to identify and pool their resources to improve care, as well as using taxpayer funds more efficiently and effectively.