Police, Corrections and others will compete for cash from $3.8b fund.
The Justice Ministry plans to create a megafund which will pool money from all of its sectors to better fight crime.
But the police union is concerned that the new Justice Sector Fund will create a heightened level of competition between parts of the justice system which will lead to inflated statistics.
Justice Minister Judith Collins announced yesterday that the total budgets of the Police, Corrections, Courts, Justice, Serious Fraud Office and Attorney-General sectors would have their budgets combined into a single $3.8 billion fund.
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Mrs Collins said the fund would allow savings from one sector to be used in another, high-priority area such as front-line jobs.
"When we get an underspend in one particular area, we're going to be able to look at where it's going to be best spent, either in police, corrections or the courts, to make sure we get the best outcomes," the minister said.
The single funding pool was an unprecedented initiative for the public sector. Up to $100 million could be transferred between agencies at a time, and it could also be moved across years.
The $87 million saved by the restructure of the Corrections Department would be channelled into the Justice Sector Fund, with some of it redirected to police.
Mrs Collins said the fund stemmed from the Canterbury earthquakes when Police and Corrections worked closely together and combined their resources. At the time, a temporary court was set up in the men's prison in Christchurch.
Police Association president Greg O'Connor said the fund looked good on the surface, but he was concerned it would prompt each agency to exaggerate their achievements to win funding.
"The way you get more money is to play the statistics game better than the other agency," Mr O'Connor said.
"So there is the risk that certain departments will start playing with stats at a lower level to ensure they don't lose funding.
"There's always a bit of low-hanging fruit you can pick to change your figures."
Police Minister Anne Tolley announced that the police operating budget would remain at $1.49 billion in this Budget and would focus on providing more frontline policing.
She said police were on track for a 13 per cent reduction in crime by the 2014/15 year.
This week, Mrs Tolley, in her Corrections role, announced that $65 million would be reprioritised into rehabilitating and job-training prisoners and drastically increasing drug and alcohol treatment for inmates.