RAMALLAH, West Bank (Reuters/Mohammed Assadi) - The Palestinian Authority (PA) will be able to finance its budget without the need for foreign aid by 2013 thanks to improved tax collection and cost-cutting, the prime minister said.

Salam Fayyad, a former World Bank economist, told Reuters late on Saturday his administration would still be in need of foreign aid to finance development projects after that date but not the funds that currently go toward budget support.

When we reach the year 2013, we will not need foreign aid to support the budget. We will just need development aid, Fayyad said.

The need for budget support from foreign donors is projected to fall to $1 billion in 2011 from $1.2 billion in 2010. The current deficit is equal to 16 percent of gross domestic product. The level of foreign aid was $1.8 billion in 2008.

The Palestinian Authority exercises self-rule over islands of territory in the Israeli-occupied West Bank and has political and financial backing from Western governments including the United States.

It pays salaries to 148,000 government employees, including 76,000 in the Gaza Strip, where the Hamas group seized control in 2007. A rival to the Ramallah-based PA, Hamas does not contribute any funds to its budget.

Despite his upbeat outlook for the PA's donor needs in the medium-term, Fayyad's administration currently faces a finance gap due to a shortfall in funding from Arab states.

The United Nations has warned of a Palestinian cash crisis in September due to the aid shortfall.

To reduce the impact of the crisis, the PA has decided to take austerity measures, including a reduction in spending on vehicles used by government employees. The edict, which will save millions of dollars, will take effect on October 1.

Fayyad, speaking in a briefing to journalists, said further delays in aid distribution would force the PA to take expensive loans from banks. He said he planned more spending cuts this year.

The more the funds are not paid on time, the more we borrow from banks, he said. Palestinian officials have estimated the total PA's debt to banks is about $800 million.