In July the Lord Chancellor and Justice Secretary, Kenneth Clarke, set out his stall on justice policy. The speech was timely and his analysis largely correct: it is astonishing that since he was last in charge of the criminal justice system in the early 1990s the number of people in prison has doubled. He talked about this being unsustainable and said that the policy of "banging up more and more people for longer" is short-sighted. He is right. Taking thousands of able-bodied young people out of society and returning them months later as disconnected drug addicts with criminal connections is not the way to create a safer and fairer society.

In addition to reforms to legal aid and a reassessment of the way courts are used, the Justice Secretary declared a halt to hyperincarceration. He called for bolstering the use of community sentences as a credible and fit for purpose alternative to prison. This shift will of course require some financial investment but nowhere near as much as the billions being ploughed into building prisons - such as the new contract under which a private company which usually runs train lines gets given £415,000,000 of taxpayers' money to build and run a new large prison near Belmarsh. The same company is also due to sign a similar contract in the North West.

But although this was a positive message overall, a few key items were missing. First, the role of employment in the re-settlement process was strikingly absent. The Young Foundation's work has shown that this is a key part of ensuring people are able to re-settle properly. Jobs are the best cure for reoffending and many programmes like the excellent work of Blue Sky Development & Regeneration or Transco have demonstrated a high rate of success. In the current economic climate it is going to be challenging, but through structures such as Employment Deployers which are being developed by the Young Foundation - services which help manage an offender's transition out of custody - it is possible to begin to manage some of the risks and fill some of the gaps associated with effective resettlement. This would entail a bespoke package of interventions, from through the gate support and mentoring through to supported employment.

Nor did he talk about intermediaries which can help encourage, grow and scale innovation. Our work to develop a UK Centre for Justice Innovation, in partnership with the New York Center for Justice Innovation seeks to fill this gap between theory and practice, evidence and action.

Most significantly, the announcement lacked a deeper consideration of how we can re-align incentives in a way which would ensure that local actors participate fully in Kenneth Clarke's rehabilitation revolution, in line with the Big Society agenda. At a time of fiscal austerity Government should be taking a serious look at innovations, such as Social Impact Bonds, and consider whether these can be widely applied. The aim is both to generate cheaper solutions, and to incentivize better outcomes.

Social Impact Bonds could open the way for local government to collaborate with local third sector providers to provide preventative interventions aimed at reducing the demand for  prison places.

Ken Clarke's speech seems to have signaled a gradual reversal of the "prison works" mantra. His questioning of the blunt "bang them up" approach could pave the way for effective and robust innovations.

The Young Foundation's report on justice innovation "Turning the corner? Beyond incarceration and re-offending" will be published this month.

You can follow our justice team on twitter @YF_Justice

This article is from the July 2010 Young Foundation newsletter update "All in a day's work".