The booming prison population will hit the Government's books by an extra $2.5 billion over about five years - with Finance Minister Bill English saying it will "limit choices" about other spending.
Asked if the outlay could reduce possible tax cuts, English said, "it will have an impact because it's a very large spend".
"I wouldn't want to judge that because it is a bit early. But certainly spending this kind of money on prison capacity is going to reduce other options.
"This is something that has to be done...we'd certainly prefer to be in a position where this wasn't happening."
The Government this morning announced plans for a growing prisoner population including double-bunking for an extra 80 beds at Ngawha in Northland, a new building at Mt Eden to take 245 extra prisoners, and possibly a new 1500-bed prison on the current Waikeria Prison site in Waikato.
A 1500-bed prison at Waikeria would be more than the capacity of the existing Waikeria Prison and Auckland Prison at Paremoremo combined.
Corrections Minister Judith Collins said prison population growth required a further 1800 places.
Work was already underway to add 341 prison places through double-bunking and converting facilities to accommodate more beds.
But another 1800 places were needed which would cost $1 billion in capital costs.
English told media that there would be an extra operating cost of another $1.5 billion to run the extra beds over five or six years.
Labour leader Andrew Little last week announced policy to boost frontline police numbers by 1000, and today said the need for more prison beds showed why that was needed.
"When you take police off the beat, when you close down community police stations, you remove the deterrent effect."
Labour's Corrections spokesman Kelvin Davis said the Government was spending billions on new "production lines for criminals" - something that made a mockery of the "social investment" approach, that aims to invest wisely to cut later downstream costs.
"Bill English was the person that said prisons were a fiscal and moral failure, and he was dead right. Wouldn't you prefer to spend $1 billion on stopping people getting into prisons in the first place rather than locking them up."
Green Party justice spokesman David Clendon said Collins comments about the need for new prison beds was "galling".
"Prisons bursting at the seams is a symptom of the Government's systemic failures, not its successes."
The Corrections Department is now having to advertise positions having laid off almost 200 prison guards only last year.
Collins denied that showed poor planning. Rather, it was a sign that the Government was "deadly serious" about getting tough on drug-related crime and family violence.
"I'm sure that there will be jobs available now for those [prison guards who lost their jobs recently]. The department is currently recruiting 600 people, 100 of whom are from offshore who are very experienced. What they always like to have is a good mix."
A business case for a new Waikeria prison would be considered next week.
It would be operated by Corrections but built and maintained by a public-private partnership which was the same model being used in a new maximum security facility in the grounds of Auckland Prison, at Paremoremo.
Collins said the proposed double bunking at Northland would be in place by early 2017; the new accommodation block at Mt Eden would be in place by late 2019; and if approved the new Waikeria Prison would get its first prisoners in 2020.
Collins said the next stage of the prisons programme would also target the drivers of crime, drug and alcohol abuse and domestic violence.
Corrections was proposing an increase to the delivery of rehabilitation programmes, including drug-treatment units, reintegration programmes, education and training programmes, and special treatment units to help address violent and sexual offending.
Reoffending target to be missed
The Government probably got it wrong when it set an official target to cut reoffending rates, Corrections Minister Judith Collins says.
The reoffending rate (a better public service target) is down 7.7 per cent since 2011, a considerable way off the BPS goal of 25 per cent by June next year.
Progress looks more impressive if the number of people reoffending is looked at - a 25 per cent drop since 2011 - not the reoffending rate.
Collins yesterday told media that the BPS goal was "probably not the right target" to have set.
"In hindsight it would have been better to have set it on numbers of people, rather than offending."
That was not Finance Minister Bill English's view, who said he still backed the reoffending target, as everyone in Corrections and Cabinet did.
However, he said all BPS targets would be reviewed as they expired.