Yes, Israel was created, and now we have Israelis, who are both Jewish and Arab. There is no country of Palestine, yet. Therefore, there are no Palestinians. Palestine was an ancient region, that has been conquered countless times by countless peoples, as Newt notes. I believe Newt's point (and without more context, I could be way off) is that, when people argue that there should be a Palestinian state because there are "Palestinians," that is a completely backwards argument or, to put it another way, "rough ridin' Fake Sugar Dick (WARNING, NOT THE REAL SUGAR DICK!)."
Arguments by the "Palestinians" that Newt's comments are "racist," are also "rough ridin' Fake Sugar Dick (WARNING, NOT THE REAL SUGAR DICK!)," as others have noted.
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The term Palestinian represents an ethnic group of Palestinian Arabs who maintain a unique Palestinian Arabic vernacular. This group was part of a more cosmopolitan political area following the fall of the Ottoman Empire the area, controlled by the British was known as the British Mandate of Palestine. Irregardless of this to say that there are no Palestinians because there is no Palestine is a flawed anthropological concept. A comparable situation, both regionally and sociologically, would be to claim that there are no Kurds because there is no Kurdistan. Or to say that the ethnic groups populating the Balkan peninsula only became ethnic groups following the "balkanization" of Serbia. These point are inherently flawed and without merit.
Secondly... If Newt's point is to say that "when people argue that there should be a Palestinian state because there are "Palestinians," that is a completely backwards argument". That would be ok if people actually made that argument. However this is not an argument that i have ever heard made and constitutes an extreme simplification of the motivations and justifications for a Palestinian State.
At BEST. Newt's comments are unnecessary and inflammatory.