The Government has abandoned plans for a mega-prison in the Waikato, but has not yet revealed its back-up plan.
The Corrections Department has sought approval to upgrade Waikeria Prison near Te Awamutu to 3000 beds, but Cabinet has repeatedly delayed a decision on it.
Corrections Minister Kelvin Davis said today that it would not be approving Corrections' proposal.
The decision not to proceed with the expansion did not solve the problems of a rising prison population and low prison capacity, he said.
Davis said he would be working with Minister of Justice Andrew Little and Police Minister Stuart Nash to come up with solutions.
"We will take action, but it will be considered and not reactive."
Last week's Budget allocated $200m for new modular units capable of housing 600 prisoners.
But unions representing Corrections staff say that will not relieve the pressure at Waikeria, which they said was dangerously crowded and run down.
National leader Simon Bridges said the Government had made the wrong decision.
"No one likes prisons … but the reality is for the prison muster it's required," he told Radio NZ.
The rebuild needed to go ahead because the prison was unsafe and rehabilitation could not take place, he said.
The Labour-led Government has committed to reducing the prison population by 30 per cent within 15 years.
The muster is forecast to rise from current levels of around 10,700 to 12,000 by 2025.
Bridges said the Government would have to "soften" bail, sentencing and parole laws to achieve its target.
"I take the old fashioned view that that makes communities less safe."
The Government is hosting a criminal justice summit in August to discuss how it can reduce the prison population.