Major budget cuts will mean 3,000 fewer criminals in prison four years from now, the Ministry of Justice has said.
The department said radical change to how criminals are dealt with are planned in an effort to meet the cuts announced in the Spending Review.
The Home Office has said that police funding will drop by a fifth - but will not predict what this means in terms of numbers of police officers.
Other cuts include £350m from Legal Aid and 5,000 UK Border Agency posts.
The two Whitehall departments responsible for criminal justice and the police spend about £20bn between them, much of it on staff.
Under the plans announced in Parliament, the Ministry of Justice's spending will fall from just £8.3bn in 2010 to £7bn by 2014.
The Home Office's budget will be cut from £9.3bn to £7.8bn. In both departments, the spending cut is roughly 23%. Capital spending will also be cut almost in half.
In a statement, the Ministry of Justice said that a major package of reforms will lie at the heart of its plans to meet the cuts set out by the Chancellor George Osborne.
It said: "The reforms will stabilise the prison population and then start to reduce it by 2014-15. We expect that by the end of the Spending Review period the number of prisoners will be around 3,000 lower than it is today."
The ministry said that "dangerous and serious" offenders would still go to jail - but that a range of new rehabilitation tactics would be introduced to cut the number of other low-level criminals who would need to be behind bars.
These include more sentences in the community and performance-related contracts with private and voluntary bodies charged with rehabilitating criminals. The ministry has also pledged to rethink how prisons deal with drug addicts and the mentally ill. Plans for a privately-run 1,500 place prison have also been shelved. Most of the measures will be subject to changes to be outlined in a Green Paper on rehabilitation and sentencing.
If the ministry succeeds in cutting the numbers in jail by 2015, it would be the first fall in the population for two decades.
Justice Secretary Ken Clarke said: "We need to create a justice system that punishes the guilty, reduces re-offending, protects our liberties, and helps those most in need.
"Over the period of this spending settlement the Ministry of Justice will be transformed into a lean, transparent, and affordable department."
The Home Office, facing a 6% year-on-year cut, said that central government funding for police in England and Wales would fall by 20% over the course of the Spending Review.
But the total cut may turn out to be only 14%. That's because police authorities are under pressure to raise the precept, the amount of a force's budget that comes from council tax.
Officials have not published figures for the number of police and civilian staff job losses - but insist that claims of between 40,000 and 60,000 are wholly wrong.
Home Secretary Theresa May said: "My absolute priority, as Home Secretary, is to ensure that the UK retains its capabilities to protect the public, secure the border and tackle the terrorist threat.
"We also have a responsibility to reduce the budget deficit and the Home Office must play its part in this.
"I believe that by improving efficiency, driving out waste, and increasing productivity we can maintain a strong police service, a secure border and effective counter terrorism capabilities whilst delivering significant savings."
However, Shadow Home Secretary Ed Balls said Mrs May had "abjectly failed to fight the corner of police".
"This Spending Review is not only reckless and dangerous for jobs and the economy but is taking huge risks with the public's safety, crime and national security," said Mr Balls.
"Deep cuts of 20% to police funding... will be impossible to achieve without massive cuts to the numbers of police on the street and programmes to fight crime and anti-social behaviour. They go way beyond what can be achieved through efficiency savings and better procurement.
"And cuts to the funding of border controls and counter-terrorism policing risk weakening our defences against threats to our national security."
Police chiefs have been preparing for thousands of job losses - but the projected cuts are above what they think can be saved without affecting frontline duties.
Chief Constable Grahame Maxwell, who speaks for the Association of Chief Police Officers on finance, said the cuts would have a "significant impact" - but the full picture would not be known for some weeks.
"The cumulative effects of cutting police budgets year on year will translate into reductions in police officers and staff, in each force depending on financial circumstances and the particular division between local and central funding through which the force is funded.
"There will be a need for honest conversations between politicians, the public and the police about how policing meets this challenge."