A new 700-bed maximum-security Victorian prison will get $689.5 million in the upcoming state budget.
The facility is being built to cope with Victoria's ballooning inmate population, with more than 7000 people now in the state's prisons.
Corrections Minister Gayle Tierney said the growing numbers were due to a combination of more police arresting people and tougher bail and sentencing laws.
"It's unfortunate that we need to build new prisons, but it just is a matter of fact," she told reporters.
"We need to ensure we have got a secure prison system so we can keep our communities safe."
Victoria's prisons are currently at 90 per cent capacity.
Ms Tierney said the system would cope until the new prison is built as 470 new beds were announced in 2017 and the new Ravenhall facility has opened.
But the government is yet to buy land for the new centre at Lara, near the existing Barwon and Marngoneet prisons.
Money has been set aside to acquire property and the government is in talks with landowners, Ms Tierney said.
Construction is expected to start in 2019 for completion in 2022.
The prison was first announced in January and it will be state-operated.
Shadow attorney-general John Pesutto said the system was under strain because prisoners on remand were being bogged down in court delays.
"We have a judicial system that is not coping with the demands," Mr Pesutto said.
"We need to make sure that committals do not continue to overwhelm the system and we need to do something about the massive number of adjournments in our system."
Victorian Greens justice spokeswoman Sue Pennicuik said building more prisons did nothing to reduce crime and the existing prevention and rehabilitation services were failing prisoners and the community.
"We can reduce crime, improve community safety and reduce the prison population if we invest more in prisoner support and rehabilitation services," she said.
