The disappointing result reiterates the need to revive flagging productivity - which measures how efficiently an economy converts inputs to output - said Cassandra Winzar, chief economist at independent think tank the Committee for Economic Development of Australia.
Australia dropped from 28th to 49th in the productivity and efficiency standings.
That accords with data from the Australian Bureau of Statistics that shows the nation's labour productivity growth rate has slowed to its lowest level in at least 20 years.
"With inflation looking to be under control in the short-term, we must now tackle the longer-term challenges holding back our economy," Ms Winzar said.
"Key to this is lifting weak productivity through measures such as streamlining regulation, encouraging business investment and undertaking broad-based tax reform."
The federal government has targeted productivity growth as a key economic focus of its second term.
Prime Minister Anthony Albanese announced a roundtable of industry, unions and experts in August to help guide its efforts.
"We hope the Albanese government's recently announced productivity roundtable yields tangible policy outcomes that can lift us out of this funk," Ms Winzar said.
"CEDA has long been calling for tax reform to be part of the Federal Government's agenda, and this report makes the need even more clear, given our consistently high levels of company and personal income taxes (ranked 59th and 58th respectively)."
The government has remained coy on whether it would consider lowering the corporate tax rate as part of its productivity push, with Assistant Minister for Productivity Andrew Leigh focusing instead on slashing onerous red tape.
"One of the big challenges here is that you're working across a range of tiers of governments, and so it's local, state and federal governments have these regulations. In many cases well-meaning, but often the cumulative effect of them is to create this thicket of regulation," Dr Leigh told Canberra radio station 2CC on Tuesday.
Housing was being particularly held back by layers of red tape, Dr Leigh said, but he backed away from a suggestion to take a "stick" to local councils that get in the way of new supply.
"Look, I'm a collaborative person. I wouldn't naturally think about taking a 'stick' to other tiers of government," he said.Â
"And I think there is a political challenge if you're a jurisdiction where your votes are coming from local residents who don't necessarily want to see infill."
Australia's worst result in the institute's ranking was its level of entrepreneurship, rating 68th out of the 69 countries included in the report.
In real GDP per capita growth - a common measure of living standards - Australia tumbled 40 places to 60th spot, reflecting the fact that the country has experienced a fall in output per person in eight out of the last nine quarters.
Opposition finance spokesman James Paterson and productivity spokesman Andrew Bragg said growth in government-funded jobs under Labor was crowding out the private sector, diminishing innovation and productivity.
"If Labor is serious about making its productivity roundtable a success, they should commit to a process beyond a one-day meeting in Canberra," the duo said in a statement.
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