Economy Minister Giovanni Tria said on Wednesday Italy's 2019 budget would include a basic income for the poor and allow people to retire earlier, meeting demands from the ruling coalition parties.

Tria told a retail association conference the so-called "citizens' income" would help manage the social consequences of technological change, and said allowing people to retire earlier would give firms a younger, more skilled workforce.

The anti-establishment 5-Star Movement, which governs with the right-wing League, threatened on Tuesday not to vote for the budget unless it included the citizens' income and a lower retirement age, along with other policies.

However, it was not immediately clear how ambitious or wide-ranging such measures will initially be, or how they will be financed. The League has said the coalition programme can be gradually phased in over the full-five year legislature.

On Thursday the government will present its economic and financial targets that underpin the budget, while the actual measures must be approved by the cabinet by October 20.

Financial markets are banking on Tria, a former academic who is not affiliated to either party, to keep a lid on public finances and to water down some of the big-spending plans of the coalition that took office in June.

Italy's public debt, at around 131 percent of national output, is the highest in the euro zone after Greece's.

In his speech Tria tried to strike a balance between promising a growth-friendly, expansionary package while maintaining the confidence of markets and avoiding a head-on clash with the European Commission.

"We are working on a mix of policies that show everyone they should have confidence in Italy, not only in our public finances but in our economic growth," he said.

Italy has been the most sluggish economy in the euro zone since the start of monetary union almost two decades ago and the number of people living in poverty has tripled in the last 10 years.

More investment

The budget will raise public investments to 3 percent of GDP within three years, Tria said, from about 2% in 2017.

The updated targets will "send a message to markets on the sustainability of our debt," he said, adding that the budget would aim to halve the growth gap between Italy and the rest of the EU next year.

Italy's bonds rallied on Tria's comments, with the gap between Italy's benchmark 10-year bond and the safer German equivalent falling to a two-week low of 228 basis points, down some six points from Tuesday's level.

Tria warned against "pointless" quarrels with the European Commission over Italy's fiscal plans and said financial market stability was a pre-requisite for boosting the economy.

Relations inside the government have been tense in recent weeks, with the 5-Star Movement accusing Tria's ministry of trying to hamper the implementation of its election pledges such as a basic monthly income of up to €780 for the poor.

Deputy Prime Minister Luigi Di Maio, who leads the 5-Star Movement, has promised the budget will make a major impact on Italy. "We, in a decisive manner, with this budget law, will have abolished poverty," he told state television RAI.

Tria has softened an initial insistence that the 2019 deficit should be no higher than 1.6% of GDP and is now willing to accept a ratio of around 1.9%, government sources have said.

That would compare with a target of 1.6% this year and would be sharply up from a 0.8% goal penciled in for 2019 by the previous centre-left administration.

The leaders of 5-Star and the League are still pushing for a 2019 deficit between 2% and 2.5% to fund their promises of higher welfare spending and tax cuts.

Tria said tax cuts, most strongly advocated by the League, would begin with corporate tax reductions in 2019 and only be extended to individuals in future years.