By Steve Scherer and Giuseppe Fonte
ROME (Reuters) - Italy's 5-Star leader Luigi Di Maio on Tuesday said next year's budget must account for their key demands, including a minimum income for the poor and unemployed, or it would not win the support of his group in parliament.
The government, made up of the anti-establishment 5-Star Movement and the far-right League party, must present its first budget and economic targets this week. They later are voted on in parliament.
According to a statement, Di Maio told 5-Star ministers in a meeting that budget goals "will not get 5-Star votes" if they did not include its flagship campaign pledges of a minimum income, to slightly lower retirement age, and reimbursements for savers defrauded by banks.
The bond market had been boosted during the day by signs that the coalition was heading toward a compromise to keep next year's deficit target below 2 percent of gross domestic product.
The leaders of the parties in Italy's government, the far-right League and the anti-establishment 5-Star Movement, have been promising since forming their coalition in June to spend more and tax less, unnerving markets as well as authorities in Brussels.
Both parties are seeking tax cuts and higher welfare spending to spur the economy, but the central bank is concerned that a spike in the deficit could put Italy's debt mountain on an unsustainable course.
"The idea to remain below the psychological threshold of 2 percent is prevailing," a government source said after a budget meeting late Monday at Prime Minister Giuseppe Conte's office.
Another source said that during the encounter, Economy Minister Giovanni Tria, an academic who does not belong to either of the ruling parties, repeated his call for a 2019 deficit target of 1.6 percent, while 5-Star and League ministers pushed for a figure above 2 percent.
"We could continue to cut healthcare and services ... or we could do a little bit of investment in deficit and, by investing, spur growth and repay our debt," Di Maio said during the recording of a TV interview.
The minimum income - a 780 euro ($920) monthly payout to those who qualify - would start being disbursed in mid-March while low-income pensioners would see a boost from January, Di Maio said.
Italy has the biggest debt pile in the euro zone in terms of GDP after Greece and the fear that its government could foster uncontrolled spending has unnerved markets, causing a sharp rise in interest rates over the summer months.
Signs that the coalition looked ready to compromise over the budget helped Italy's 10-year bond yield fall to 2.89 percent, shrinking the spread over benchmark German Bund yields to around 232 bps, from around 245 bps late on Monday.
Conte flew to New York on Tuesday to attend the U.N. General Assembly and is due to return in time for a cabinet meeting expected on Sept. 27 to sign off on the budget goals.
($1 = 0.8498 euro)
(Additional reporting by Giselda Vagnoni and Angelo Amante; editing by Robin Pomeroy and Lisa Shumaker)