Justice minister Ken Clarke is expected to announce major cuts to the £4bn prisons budget in a speech later today, with construction plans for new prisons likely to feel the axe.
He needs to cut £2bn from the £8.7bn ministry of justice budget, which includes £4bn spent on prisons and £2bn on legal aid.
The previous Labour government had planned to build five new prisons to reduce the pressure on the prison population, but Clarke is expected to reverse that decision and instead encourage more community sentences.
The prison population has doubled to 85,000 since he was home secretary in the early 1990s, with each inmate costing the tax payer £38,000 a year.
Clarke will call for 'intelligent sentencing' to reduce the prison population, arguing that it is impossible to rehabilitate a minor offender who is serving a short sentence.
The announcement is likely to be seen as a sop to the Liberal Democrats, who had pledged to cut back on prison building in their election manifesto, promising to concentrate more on community rehabilitation.
The Tories had proposed to honour Labour's commitment to lift prison capacity to 96,000 by 2014.