The Treasury has floated the prospect of police being more "selective" about enforcing the law on low-level crimes as one way of reducing the number of people being sent to prison.
And it says there may be more scope for police to consider increasing the use of diversion and restorative justice as an alternative to seeking convictions.
The police, whose discretion on prosecution is not allowed to be politically directed, yesterday refused to say if they were considering the option.
A spokesman for Police Commissioner Howard Broad said ministers were meeting on Wednesday to consider reforms to the criminal justice system.
The law enforcement suggestions are raised in the Treasury Department's review of criminal justice, obtained by National MP Simon Power under the Official Information Act and made public in the Herald yesterday.
The review says the cost of crime was $9.1 billion in the 2003-04 financial year, and the figure is rising.
The review was conducted after a request from the Finance Minister for advice on ways of reducing the long-term cost of keeping people in jail.
It said part of the problem was that a move towards tougher sentences had resulted in an unexpected rise in the number of people in jail.
Mr Power said the Treasury suggestions would be "a poor way" for police to go.
Justice Minister Mark Burton said the Government was reviewing the justice system, and papers would go to the Cabinet soon.
The public had wanted tougher sentencing for the worst offenders, he said. This had been achieved, and there was now a need to consider whether prison was the best place for lesser offenders.
"I think the wider public debate now is to address the many others for whom prison isn't an appropriate, effective or even cost-effective use of public resources and doesn't get the results we want."
"Overwhelming international experience" showed that once people served jail terms, the likelihood of their reoffending increased.
The Treasury report said high imprisonment rates were a result of policy settings "and the way discretion is exercised within the system".
That stemmed from the community's desire for tougher sentences, rather than for discussion about the aims of punishment and the best way to achieve them.
It says judges and the Parole Board have become reluctant to take chances, and asks if police should exercise more discretion about law enforcement and decisions to arrest, charge and prosecute.
One option was more "selective enforcement of crime", under which the police would decide when and where to enforce specific laws, particularly those with "relatively minor consequences for society".
This discretion was already used in dealing with crimes related to such things as prostitution and gambling.
There might be scope for greater use of alternatives such as diversion and restorative justice, the report says.
It cost between $70,000 and $77,000 a year to house a prison inmate.
The report suggests that one way to make the best use of prison would be to jail only criminals who, if left at liberty, would be likely to commit crimes costing society much more than the cost of keeping them in a cell.
Mr Power said he would not be in favour of reducing law enforcement because of problems with the prison system.
Asked if he supported more use of restorative justice and diversion, he said: "I don't think it's the answer to the central question.
"The central question is how do you stop the crime from being committed in the first place."
Possible ways to cut prisoner numbers:
Reverse the trend and reduce the number of people remanded in custody.
Reduce the number of offenders serving short prison terms for things such as traffic offences, non-payment of fines and breaching alcohol and drug laws, which previously did not always incur prison sentences.
Identify inmates with mental health problems, who could be placed in supported community arrangements.
Use different systems of punishment for some young offenders - for example, restricting access to cars or alcohol.
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