Victoria has almost doubled spending on prisons in the past decade despite jail time failing to deter criminals from reoffending.
Advocacy group Justice Reform Initiative says the state's annual bill of more than $1.5 billion to lock up adults and children is a failure by the government.
The bill accounts for prison operational costs alone and Victorians expect better when alternatives, such as rehabilitative programs, are far more effective at reducing recidivism, the group said.
The initiative is pushing for the state government to redirect funding from prisons and establish a $300 million breaking the cycle fund over four years.
"What is a failure is investing in a system that we know is broken," executive director Mindy Sotiri said on Tuesday.
"We know that prison doesn't work to rehabilitate, we know it doesn't stop people from committing crime and, we know that ultimately it doesn't make the community safer because people leave prison more likely to reoffend."
The government's prison bill represents a 96 per cent increase over the past decade and the cost of locking up children has blown out by 351 per cent, a report by the initiative found.
Last year, there were almost 6600 adults in Victorian prisons on an average night, 35 per cent more than 10 years ago.
More than 40 per cent of Victoria's adult prison population were on remand, meaning they had not yet been convicted of a crime, as were more than 80 per cent of children in 2022.
Dr Sotiri said Victoria had an opportunity to lead the country in justice reform, for which there was "clear political will and desire" noting the government's commitment to raising the age of criminal responsibility and changing bail laws.
Initiative chair and former federal Aboriginal affairs minister Robert Tickner said the report sent a message to all Victorian parliamentarians that there was a better way to lead the country in criminal justice reform.
Australia nationally was "absolutely not" heading in the right direction, Mr Tickner said.
"The level of Aboriginal incarceration is at record levels ... and many of the solutions recommended by the Royal Commission into Aboriginal Deaths in Custody in the early 1990s have still not been implemented," he said.
Sara Stilianos, who works with the Justice Reform Initiative and has spent time in the prison system, said support for detainees was lacking.
Incarcerating people, isolating them from their communities, and punishing them for behaviours that stemmed from disadvantage and trauma only exacerbated harm, she said.
The Victorian government said it implemented significant prison reform including overhauling bail laws.
A spokesperson said the entire system must be examined to create change to help people avoid coming into contact with the justice system.
"It's therefore important that we look at what else can be amended or created and explore different ways of preventing crime, reducing reoffending and providing genuine opportunities for Victorians to turn their lives around," they said.
A Justice Reform Initiative includes Aboriginal leaders, former parliamentarians, experts and judicial figures.
