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|Zak Brown, chief executive of McLaren. (AFP/Peter PARKS)|
The FIA's World Motor Sports Council ratified the amendments to F1's rules in a season decimated by COVID-19 with 10 of the scheduled 22 races already either cancelled or postponed.
From 2021, costs will be capped at US$145 million (132 million euros) with a limit of US$140m for 2022 and US$135m for 2023-2025, based on a 21-competition season, said a FIA statement.
Before the pandemic struck, a spending cap of US$175m was set to be introduced next year in a bid to help even up the competition.
"The World Motor Sport Council has approved further changes to the regulations governing the FIA Formula One World Championship primarily due to the ongoing need to reduce costs and safeguard the sport in light of the COVID-19 pandemic," added the statement.
As well as a budget cap, the FIA also agreed to a host of changes to technical and sporting regulations.
"Formula 1 wins today," said Zak Brown, the chief executive of McLaren.
"This is a crucially important moment for our sport. F1 has been financially unsustainable for some time, and inaction would have risked the future of F1 and its participants."
On Tuesday, McLaren, who also make supercars, said it planned to cut 1,200 jobs and signficantly scale down its racing division after the coronavirus crisis hit sales.
British media reports said about 70 of the racing team's 800 jobs will be eliminated by the restructuring plan.
Earlier this month, F1's managing director Ross Brawn had warned of a "tragedy" if financially struggling teams were forced out of business.
"The message is clear. We've got to cut costs and have a reduction of the cost cap ... If we lose some teams in this period it would be a tragedy," he said.
"There is going to be a much more equitable prize fund in the new agreement. The midfield teams in particular are going to be much better off in terms of their proportion of the prize money.
"So a good midfield team should be able to score podiums, maybe a win, and should be able to show a small profit. If we can achieve that we should have a very sustainable future."
The 2020 Formula One season is due to get underway in Austria with back-to-back races on Jul 5 and 12.