Reoffending could rise because of cuts to prisoner management services, an influential committee of MPs said.
The Public Accounts Committee praised the National Offender Management Service (NOMS) for successfully slashing £230 million from its spending in 2011/12.
But the committee, chaired by Labour MP Margaret Hodge, raised serious questions over whether a further £650 million could be saved from its current £3.4 billion budget by 2015.
Mrs Hodge said the current plans to save the money were dependent on redundancies the agency cannot currently fund and the stability of the prison population, which it cannot control.
And she said: "There is also a risk that reduced numbers will result in staff being taken off offender management programmes to cover duty on prison wings. This means that training and rehabilitation activities could suffer, even though we know these reduce reoffending after release. The agency needs to seriously consider the long-term consequences of short-term cuts."
Mrs Hodge said there were further concerns about the safety of prisoners and the fact overcrowding has become institutionalised.
In evidence to the committee, NOMS said savings would be found as older, expensive prisons are replaced by modern facilities.
But the MPs on the committee, which is cross party, said this was based on the assumption overall prisoner numbers would not increase from the current level of about 86,000. Mrs Hodge said her committee concluded a rethink of prison policy was needed.
Justice Secretary Chris Grayling said: "Running prisons that are safe, decent and secure is a priority. We will continue to drive down running costs by replacing old prison accommodation with new places that are better value for money and provide better opportunities to reduce reoffending.
"NOMS will meet its savings target for 2012/13 of £246 million while maintaining its overall performance. Our transforming rehabilitation proposals will change the way we deal with offenders on release and help us to stop the depressing revolving door of reoffending. Our plans do not involve probation trusts having an expanded role in commissioning."