ROME (Reuters) - The ruling coalition is willing to keep Italy’s public deficit below 2 percent of gross domestic product next year, a government source said, signalling a compromise that boosted the Italian bond market on Tuesday.

FILE PHOTO: Italian Economy Minister Giovanni Tria attends as Prime Minister Giuseppe Conte (unseen) speaks during his first session at the Lower House of the Parliament in Rome, Italy, June 6, 2018. REUTERS/Tony Gentile

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.

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,” the 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,” 5-Star Movement leader and deputy prime minister, Luigi Di Maio, said during the recording of a TV interview.

The 5-Star’s flagship campaign promise - a 780-euro (698 pounds) monthly “citizen’s income” - would start being paid out in mid-March while low-income pensioners would see a boost from January, Di Maio said.

A 5-Star source said a meeting of the group’s lawmakers and ministers had been convened for late Tuesday to discuss the public finance targets.

Italian daily La Stampa reported on Tuesday that ministers had agreed to a compromise and would endorse a 2019 deficit of 1.9 percent of GDP. The budget would also include a 36 billion-euro ($42 billion) investment package that has been touted by Europe Minister Paolo Savona.

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 IT10YT=RR, shrinking the spread over benchmark German Bund yields to around 232 bps, from around 245 bps late on Monday.

The prime minister’s spokesman said last week that 5-Star would sack Treasury officials unless they found the resources needed for extra welfare spending.

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.

Italy has to set growth, deficit and debt targets for 2019-2021 by Sept. 27 and will have to submit its draft budget for next year by mid-October.