The word 'Palestine' has two different meanings:
1- The people of the Gaza Strip (also called Philistines historically)
2- The area in which Israel and Gaza are located, stretching from the Mediterranean to the Jordan River
In this case, the reference is to the second meaning.
And also, Jesus was born at the time of the Roman Empire, when Herod was the 'secondary' king of Israel, under Caesar.
Historically, the Palestinians occupied just the Gaza strip, and they settled in the rest of Israel fairly recently.