Prison and probation services in England and Wales must be overhauled to drive down re-offending rates that cost the taxpayer billions of pounds, according to a report.
Ministers were urged to push up staffing numbers and bring in legislation to establish a new rehabilitation "duty".
The potential impact that prisons could have on reducing re-offending has been undermined by "a lack of consistent political leadership", according to a report published by the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA).
It welcomed the government's commitment to prison reform and called for the Ministry of Justice to compile a national rehabilitation strategy running to 2020.
Suggested measures include a rehabilitation requirement for prisons and probation, which would be a legal duty and require services to track individual and institutional progress, as well as a return to frontline staffing levels seen in 2010.
It also proposes that the National Offender Management Service should have a smaller, "arms-length" function, and the creation of local prison boards to oversee long-term strategies.
Report author Rachel O'Brien, director of the RSA's Future Prison project, said: "The potential impact that prisons could have on reducing re-offending and community safety has been undermined by a lack of consistent political leadership and clear purpose.
"This has led to reactive policy, episodic change and an over-centralised system, which has disempowered the workforce and undermined public confidence."
Official figures show that from October 2013 to September 2014, around 496,000 adult and juvenile offenders were cautioned, received a non-custodial conviction at court or released from custody.
Around 128,000 - or one in four - of these offenders committed a new offence within a year. Last year, former Justice Secretary Michael Gove described the failure to reduce re-offending rates as "horrifying".
Mr Gove's successor Liz Truss is poised set out her plans for prison safety and reform in the coming weeks, amid mounting concern over a rising tide of violence behind bars.
A Ministry of Justice spokeswoman said: "We are committed to rehabilitating offenders to reduce re-offending and create fewer victims.
"We will set out full details of our plan for prison safety and reform in a White Paper in the coming weeks and are carrying out a comprehensive review of the probation system to improve outcomes for offenders and communities."