Schaeuble, speaking at a news conference after the cabinet approved the spending plans, rejected criticism that income tax cuts of 15 billion euros (13.29 billion pounds) a year over that period was too low to significantly boost growth through consumption.

"A modest and reliable fiscal policy doesn't allow much more wiggle room (to cut taxes)," Schaeuble said. "Our mid-term fiscal plans take into account the possibility of moderate interest rate rises and we set aside provisions," he added.

The budget must still be confirmed by the lower house of parliament after a Sept. 24 national election.

Asked about Italy's decision to start winding down two failed regional banks in a deal that could cost the state up to 17 billion euros, Schaeuble said that the European Union needed to look again at whether loopholes were created by differences between bank closure rules and national insolvency regimes.

(Reporting by Gernot Heller and Klaus Lauer; Writing by Joseph Nasr, editing by Thomas Escritt)