A 600-bed jail to be built in northern NSW could be run and staffed entirely by the private sector.
Treasurer Gladys Berejiklian's Tuesday budget will allocate just under $1.2 billion to the correctional system, as the NSW prison population hits record highs.
Along with a new jail at Grafton, the government has promised a 400-bed expansion of the Parklea prison in Sydney's west to cope with the surge in inmate numbers.
"There will be no `no vacancy' signs at any of our correctional facilities," Deputy Premier Troy Grant told reporters in Sydney on Thursday.
Minister for Corrections David Elliott said the government would "make no apology" for the growing number of people incarcerated across the state.
"We make no apology for the fact that our bail laws are the best bail laws that this government could provide the people of NSW," he said.
"We make no apology for the fact that we are cracking down on crime."
The new facility in Grafton will be built on a public-private basis and is expected to create 100 permanent positions.
But it is possible none of the new jobs will go to public workers.
"There will be Corrective Services staff employed by the private-sector operator running the facility - if indeed the offers are evaluated as presenting the best value for money," Corrective Services Commissioner Peter Severin said.
Thursday's announcement comes less than three years after the existing Grafton jail was significantly downgraded, in a decision that prompted mass protests and a five-day blockade of the historic facility by locals concerned about public job losses.
Mr Severin on Thursday defended that decision, saying it made sense at a time when prisoner numbers had "rapidly declined", while the government is now grappling with the opposite scenario.
"We have experienced unprecedented growth in inmate numbers over the last few months, and some of our institutions are nearing capacity," he said.
The state's prison population is reaching capacity at about 11,600 inmates, said Mr Grant.
Mr Severin conceded the government's new bail laws, which came into force in January, meant more people were being placed on remand, though he said there had been some growth in prisoner numbers before the legislation took effect.
Authorities have already promised short-term solutions to the population explosion, including steel modular cages built by prisoners themselves.
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