Israel on Thursday announced cuts to corporation and value added tax intended to spur growth, but the central bank warned they are likely to increase public debt.

At a joint news conference Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon said VAT would fall to 17 percent from 18 percent in October and tax on companies would be reduced to 25 percent from 26.6 percent from January 2016.

"An economy grows with low taxes; an economy with high taxes does not grow," Netanyahu said.

"Therefore, in order to encourage growth I decided, with Finance Minister Moshe Kahlon, to reduce taxes," he said.

Both men said the move was made possible by recent higher than predicted tax revenues.

"That money came from the citizens and we intend to return it to the citizens," said Kahlon, who pledged social and economic reform in the March general election.

But Israel's central bank issued a swift and stern response.

"Considering uncertainty with regard to economic developments next year the reduction in VAT, which will cost about 4.8 billion shekels ($1.2 billion, one billion euros), could lead to a further increase in the deficit next year, and jeopardise the deficit target of 2.9 percent," the Bank of Israel said in a statement.

"Furthermore, VAT reduction at this time would make it difficult to meet fiscal targets for the coming years."