Finance Minister Moshe Kahlon, after consulting with Defense Minister Moshe Ya'alon, has also decided to issue thousands of additional work permits for Palestinians to work in Israel, as well as reduce commissions Israel charges from the Palestinians.
Kahlon shares the defense establishment's assessment that the way to mitigate the recent wave of violence is by improving the Palestinians' economic situation and creating hope on the Palestinian street.
He also believes that taking positive economic measures towards the Palestinians will be well received among Western powers.
Palestinian Finance and Planning Minister Shukry Bishara met with Kahlon last week and warned him the PA was on the verge of economic collapse. According to Bishara, the PA's deficit was at NIS 1.5 billion. The NIS 500 million Israel is planning to transfer to the Palestinians, tax money it collected on behalf of the PA and has so far withheld, could help cover a third of the deficit and allow the PA to pay teachers and providers.
On Wednesday, Kahlon met with Prime Minister Benjamin Netanyahu and presented him with the measures he decided on. Netanyahu did not object, as these steps are in line with commitments the prime minister made to US Secretary of State John Kerry and with other measures the government is supposed to decide on.
"The government ministers are not opposed to economic steps towards the PA," Kahlon said on Thursday. "There's no diplomatic move here."
In his meeting with the Palestinian finance minister, Kahlon clarified that Israel was giving the Palestinians money that belonged to them. He further stressed to Bishara that in return for the transfer of these funds, Israel expects the Palestinians to stop the incitement on PA media and for Palestinian President Mahmoud Abbas to condemn the terror attacks.
"There are people in Ramallah who have never met an Israeli soldier or police officer," Kahlon told Bishara. "They identify with terrorism only because of the incitement."
However, the demand to stop the incitement was likely not presented as an ultimatum. Kahlon has been speaking in broad terms that Abbas needs to "change the current atmosphere."
The Palestinians have also agreed to Kahlon's request to renounce a claim for money they say Israel owes them from the years 1999-2002.
On Sunday, Bishara sent Kahlon an official letter from the Palestinian Authority, which is an unusual document in its content and language in a time of a serious conflict between Jerusalem and Ramallah.
"I would like to express my profound appreciation for last Thursday's meeting. I hope that throughout our discussions, I have succeeded in conveying to you the gravity of the financial challenges that I have to deal with, and in consequence the need to find satisfactory resolution to the issues which are under discussion," Bishara wrote.
"I left our meeting heartened that, owing to your leadership and understanding, we have reached a positive turning point and set the stage for new beginnings in the commercial relationship between Israel and ourselves. Although the accommodations that you have already agreed to fall short of what is actually required to resolve comprehensively the outstanding issues, yet I do believe they constitute a welcome and positive step forward.
"There is a great deal of hard work ahead of us, and I personally look forward for continued dialogue and cooperation with you," Bishara went on to write.
"Peace did not break out," Kahlon said on Thursday. "It's just one drop in the ocean - but it's an important drop."