The Productivity Commission will also examine whether the $9 billion spent on mental health care is delivering the best results.
Leading advocacy groups have hailed a major new Productivity Commission inquiry into Australia's mental health system as a significant step forward.
The inquiry will look at the impact of mental illness on the economy and scrutinise the $9 billion spent a year by federal, state and territory governments.
Beyondblue chief executive Georgie Harman said the inquiry had the potential to drive real change.
"This announcement reflects what the mental health sector has been calling for; that the impacts of mental health be recognised as a fundamental and core part of governments' economic and productivity agenda," Ms Harman said on Sunday.
Mental Health Australia chief executive Frank Quinlan said if the commission delivered clear recommendations it would be a positive step towards improving Australians' mental health.
But he questioned why so many previous inquiries and reports had failed to come up with solutions.
"I don't think anyone looking at the most recent statistics on suicide can be satisfied with more of the same," Mr Quinlan said.
There were 3128 deaths by suicide across the nation last year, compared to 2866 in 2016, data from the Australian Bureau of Statistics released last week.
Treasurer Josh Frydenberg said one in five Australians with a mental health issue were not seeking help because of the perceived stigma involved.
He said it was appropriate to get the commission to look at how effective mental health funding was spent, with the federal government contributing $4.7 billion a year.
"We're confident that we are spending the money wisely, but that's the purpose behind the productivity commission report - to see if we can improve overall outcomes," Mr Frydenberg told Sky News on Sunday.
Psychiatrists say mental health is being shortchanged with Australia spending $9 billion a year out of its total health budget of $170 billion.
"This is a huge area of neglect and if they think efficiency is going to sort it out then they're very much mistaken," said Patrick McGorry, professor of mental health at University of Melbourne.
The inquiry will provide recommendations on how the government can most effectively improve mental health, and social and workforce participation and productivity.
Health Minister Greg Hunt said he had consulted with his state and territory counterparts to get their views on the terms of reference for the inquiry.
Labor's mental health spokeswoman Julie Collins welcomed the inquiry, but said it shouldn't be used to delay action on mental health.
She wants the government to adopt the National Mental Health Commission's target to reduce suicide by 50 per cent over 10 years.
"Labor knows there is more work to be done to improve the mental health of Australians and to further reduce the thousands of lives lost to suicide each year," Ms Collins said.
"Australians living with mental ill health cannot afford delays."
Mental health research organisation the Black Dog Institute has estimated mental illness costs the Australian economy more than A$12 billion a year in lost productivity.
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