U.K. Markets Rally as Investors Bet Government Will Roll Back Tax Plans

On Thursday, Conservative lawmakers and some government officials speculated that Ms. Truss might change tack on one of the key planks of the tax cutting plan: to reverse a planned rise in the headline rate of corporation tax to 25% from a current 19%, which the previous government of Boris Johnson had promised to keep public finances stable.

U.K. Chancellor of the Exchequer Kwasi Kwarteng said during an International Monetary Fund meeting in Washington on Thursday “our position hasn’t changed” adding that he would present a more detailed fiscal plan on Oct. 31. He didn’t, however, specifically rule out a cut to the corporation tax rate, just stating that he was focused on delivering the spending plan. “I am not going anywhere,” said Mr. Kwarteng, when pressed by reporters whether his job was on the line.

Any about-face would be the second major U-turn on a proposed tax cut since the government’s so-called “mini budget” was announced last month. Last week, the government scrapped its plans to cut the top rate of income tax to 40% from 45%.

A government spokesman earlier Thursday said “the position has not changed” on taxes.

The yield on the 30-year gilt fell 0.22 percentage point to 4.64%, data from Tradeweb showed. The pound gained 0.8% against the dollar, to $1.12.

“We had the political analysts come out and say the government is planning the mother of all U-turns and then the outlook starts to improve,” said Simon Harvey, the head of foreign-exchange analysis at Monex Europe. He said the extent of the change would be important. “All this is very dependent on the size of the U-turn and what fiscal policy is going forward,” he added.

In power for just over a month, Ms. Truss has been hit by crises ever since her government announced plans to pair big new subsidies for energy prices this coming year with the biggest tax cuts in a generation, causing some investors to worry about the impact on inflation and government debt.

Conservative lawmakers aren’t the only ones to push for a reversal in the tax plans. “Fiscal policy should not undermine monetary policy,” Kristalina Georgieva, managing director of the International Monetary Fund, said Thursday, when asked about the situation in the U.K. “So don’t prolong the pain and make sure actions are coherent and consistent.”

The government’s spending plans came at a time of rising interest rates, a weakening pound and already high inflation due in part to the war in Ukraine. The result was turmoil in U.K. financial markets, prompting the central bank to launch an emergency program of buying government bonds. The Bank of England was seeking to prevent the selloff from causing a broader financial crisis, especially in pension funds that had loaded up on derivatives as part of a strategy known as liability-driven investment, or LDI.

This week, the bank made it clear it wouldn’t continue to support the bond market past this Friday, a deadline that may have raised the pressure on the government to address some of the markets’ underlying concerns about the sustainability of U.K. finances.

Even as the government has defended tax cuts as the only way to bolster the nation’s economic growth, several senior members of the Conservative Party have said financial markets are demanding to know how these cuts, and the energy subsidy, will be paid for.

The Institute for Fiscal Studies, a think tank, estimates that cuts in government spending of around £60 billion would be needed to fund the package. Ms. Truss has already given up on a plan to ax Britain’s top 45% tax rate after a mutiny in her party.  “I’m not planning public spending reductions,” Ms. Truss said on Wednesday, though her spokesman later declined to comment whether government spending on social security would increase in line with inflation.

One option is to go ahead with the increase in corporation tax in April next year. Ms. Truss had previously said such a move would make Britain uncompetitive for business investment. “I feel it would be wrong, in a time when we are trying to attract investment into our country and at a time of global economic slowdown, to be raising taxes, because it will bring less revenue in,” Ms. Truss said Wednesday.

But increasing the tax may raise around £18 billion for the exchequer, analysts say.

The rumors of a change in tack come as the ruling Conservatives lag behind in the polls. A YouGov poll suggests the opposition Labour Party would get 51% of votes versus just 23% for the Conservative Party. But lawmakers are leery about replacing Ms. Truss given she only came into office at the beginning of September. Removing her would be a “disastrously bad idea,” the U.K. Foreign Secretary James Cleverly said Thursday.

Junking the tax plan, and Mr. Kwarteng, may be enough to ensure Ms. Truss’s political survival for now, said Tim Bale, a professor at Queen Mary University of London. “She would be given a chance,” he said. However, he added, it would leave her denuded of any political authority and at the mercy of the whims of the Conservative Party.

—Chelsey Dulaney contributed to this article.

Write to Max Colchester at max.colchester@wsj.com, Caitlin Ostroff at caitlin.ostroff@wsj.com and Quentin Webb at quentin.webb@wsj.com

On Thursday, Conservative lawmakers and some government officials speculated that Ms. Truss might change tack on one of the key planks of the tax cutting plan: to reverse a planned rise in the headline rate of corporation tax to 25% from a current 19%, which the previous government of Boris Johnson had promised to keep public finances stable.

U.K. Chancellor of the Exchequer Kwasi Kwarteng said during an International Monetary Fund meeting in Washington on Thursday “our position hasn’t changed” adding that he would present a more detailed fiscal plan on Oct. 31. He didn’t, however, specifically rule out a cut to the corporation tax rate, just stating that he was focused on delivering the spending plan. “I am not going anywhere,” said Mr. Kwarteng, when pressed by reporters whether his job was on the line.

Any about-face would be the second major U-turn on a proposed tax cut since the government’s so-called “mini budget” was announced last month. Last week, the government scrapped its plans to cut the top rate of income tax to 40% from 45%.

A government spokesman earlier Thursday said “the position has not changed” on taxes.

The yield on the 30-year gilt fell 0.22 percentage point to 4.64%, data from Tradeweb showed. The pound gained 0.8% against the dollar, to $1.12.

“We had the political analysts come out and say the government is planning the mother of all U-turns and then the outlook starts to improve,” said Simon Harvey, the head of foreign-exchange analysis at Monex Europe. He said the extent of the change would be important. “All this is very dependent on the size of the U-turn and what fiscal policy is going forward,” he added.

In power for just over a month, Ms. Truss has been hit by crises ever since her government announced plans to pair big new subsidies for energy prices this coming year with the biggest tax cuts in a generation, causing some investors to worry about the impact on inflation and government debt.

Conservative lawmakers aren’t the only ones to push for a reversal in the tax plans. “Fiscal policy should not undermine monetary policy,” Kristalina Georgieva, managing director of the International Monetary Fund, said Thursday, when asked about the situation in the U.K. “So don’t prolong the pain and make sure actions are coherent and consistent.”

The government’s spending plans came at a time of rising interest rates, a weakening pound and already high inflation due in part to the war in Ukraine. The result was turmoil in U.K. financial markets, prompting the central bank to launch an emergency program of buying government bonds. The Bank of England was seeking to prevent the selloff from causing a broader financial crisis, especially in pension funds that had loaded up on derivatives as part of a strategy known as liability-driven investment, or LDI.

This week, the bank made it clear it wouldn’t continue to support the bond market past this Friday, a deadline that may have raised the pressure on the government to address some of the markets’ underlying concerns about the sustainability of U.K. finances.

Even as the government has defended tax cuts as the only way to bolster the nation’s economic growth, several senior members of the Conservative Party have said financial markets are demanding to know how these cuts, and the energy subsidy, will be paid for.

The Institute for Fiscal Studies, a think tank, estimates that cuts in government spending of around £60 billion would be needed to fund the package. Ms. Truss has already given up on a plan to ax Britain’s top 45% tax rate after a mutiny in her party.  “I’m not planning public spending reductions,” Ms. Truss said on Wednesday, though her spokesman later declined to comment whether government spending on social security would increase in line with inflation.

One option is to go ahead with the increase in corporation tax in April next year. Ms. Truss had previously said such a move would make Britain uncompetitive for business investment. “I feel it would be wrong, in a time when we are trying to attract investment into our country and at a time of global economic slowdown, to be raising taxes, because it will bring less revenue in,” Ms. Truss said Wednesday.

But increasing the tax may raise around £18 billion for the exchequer, analysts say.

The rumors of a change in tack come as the ruling Conservatives lag behind in the polls. A YouGov poll suggests the opposition Labour Party would get 51% of votes versus just 23% for the Conservative Party. But lawmakers are leery about replacing Ms. Truss given she only came into office at the beginning of September. Removing her would be a “disastrously bad idea,” the U.K. Foreign Secretary James Cleverly said Thursday.

Junking the tax plan, and Mr. Kwarteng, may be enough to ensure Ms. Truss’s political survival for now, said Tim Bale, a professor at Queen Mary University of London. “She would be given a chance,” he said. However, he added, it would leave her denuded of any political authority and at the mercy of the whims of the Conservative Party.

—Chelsey Dulaney contributed to this article.

Write to Max Colchester at max.colchester@wsj.com, Caitlin Ostroff at caitlin.ostroff@wsj.com and Quentin Webb at quentin.webb@wsj.com