Prisoners will no longer live a life of "enforced, bored idleness" and instead be forced to work to pay compensation to their victims, Ken Clarke has said.
The Justice Secretary said he wanted prisons to become "tough places of hard work and reform" and ensure more private firms are brought in to rehabilitate offenders on a payment by results system.
Too many prisoners existed in a system where getting out of bed was "voluntary" and instead they should work nine to five jobs to gain a trade or skill, he told activists at the Conservative Party Conference in Birmingham.
Mr Clarke wants private firms to create the jobs for criminals and is even looking at the possibility of creating purpose-built workplace prisons where higher wages could generate even more cash.
Around one pound in five would be put in a fund for victims, with the rest used to cover the cost of keeping people behind bars, pay the benefits of prisoners' families or kept in trust for when they are released.
The Ministry of Justice is looking for around £2 billion of savings from its budget as part of the drastic Whitehall-wide spending review ordered by Chancellor George Osborne to tackle the UK's deficit.
Mr Clarke's push for greater emphasis on rehabilitation and community sentences in place of short sentences in an attempt to cut the record prison population is not popular with many Tory activists.
But he told the conference: "Don't worry, I haven't suddenly become in my old age some kind of woolly-minded idealist."
He added: "Let me be clear about what I have always said and always believed about crime and punishment. For serious criminals, prison is the best and only sentence. It is the punishment for serious crime that society expects and accepts."
Outlining his plans he said: "We need reform that is radical and realistic. Reform focused on results, not processes, not spin doctor headlines.
"We need in my opinion, to instil in our jails, a regime of hard work. Most prisoners, not really their fault, lead a life of enforced, bored idleness, where for the majority of them even getting out of bed is voluntary.
"If we want to reduce the crimes these people will commit when they get out, we need as many as possible to get used to working hard for regular working hours."