Prison and probation officers should be given cash incentives to cut reoffending rates, under proposals from an independent think tank headed by former Tory leader Iain Duncan Smith.
Up to three quarters of young offenders and two thirds of other prisoners commit a new offence within two years of release - costing the taxpayer at least £12 billion a year, according to the Centre for Social Justice (CSJ).
In a new report entitled Locked Up Potential, the CSJ said prison and probation officers who deliver reduced reoffending rates in their local areas should be financially rewarded.
The report was produced by a group chaired by former Tory cabinet minister Jonathan Aitken, who was imprisoned for seven months after being convicted of perjury in 1999.
Mr Duncan Smith said rewarding staff who break the reoffending cycle was a "practical way of prioritising help for prisoners and reducing crime".
The report also recommended an "overhaul" of the current system of drug and alcohol treatments for offenders, and called for the abolition of the National Offender Management Service (NOMS).
NOMS should be replaced by a local network of Community Prison and Rehabilitation Trusts (CPRTs) modelled on local NHS Trusts, the CSJ said.
Certain categories of prisoners such as the elderly, disabled and mentally disturbed should be selected to serve part of their sentences in a new network of Community Supervised Homes for Offenders (CSHOs).
Mr Duncan Smith said: "Rehabilitation of offenders should be our top priority since so much of crime is committed by people recently released from jail.
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"The monolithic and absurdly expensive wasteful NOMS system has been proved to be a complete failure and should be replaced by a devolved system working with the local community and charities to help ex-prisoners re-enter the mainstream of society and rebuild their lives."
