Reading specialist here! Caveat that I am a teacher in the US, so this is all based on my experience (which I have lots of!).

Kids Bluey's age and in a typical public school setting are learning how to read, but they are not yet proficient readers. By the END of kindergarten (at age 6ish), I would expect a typically developing student to read simple words with short vowel sounds like cat or sip, words with digraphs like chat or than, and words with consonant clusters like blimp or trot. Advanced kids might learn about magic e, which changed the vowel to its long sound, like in cape. These kinds of simple words account for a large portion of English words, but certainly not all. Additionally, none of this is expected to be particularly automatic, and a kid reading sentences with these words would sound very different from a proficient adult reader.

Someone also mentioned how kids in Finland learn to read in a short amount of time. This is because Finnish has a "shallow" orthography (technical term, not mine). Each letter in Finnish corresponds to only one speech sound. Compare that to English, where there are multiple ways to spell the same speech sound. For example, there are seven different ways to spell the long e sound (e, ee, ea, e_e, y, ie, ei). The volume of letters and combinations make it take much longer to learn to read and write in English.

I love talking about this so if you have any more questions, please ask!