U.K. Prime Minister Liz Truss Fires Treasury Chief, U-Turns on Taxes

Mr. Kwarteng, who just three weeks ago presented the U.K.’s largest tax cuts since the 1970s, was asked to quit by Ms. Truss as markets balked at the scale of the borrowing required to fund the package and her lawmakers protested at the prospect of deep public-spending cuts. Mr. Kwarteng became the second-shortest-serving chancellor of the exchequer in recent British history. He was replaced by

Jeremy Hunt,

a party centrist and former foreign secretary.

In a scramble to shore up support within her party, the embattled Ms. Truss also ditched her plan to prevent a planned rise in the rate of corporate income tax next April to 25% from 19%—a move taken by predecessor

Boris Johnson’s

government to help shore up finances. The U-turn was the second major part of her tax-cutting package to be abandoned recently.

“It is clear parts of our mini-budget went further and faster than markets were expecting,” she said in a nationally televised address. “We have to deliver the mission in a different way.”

U.K. government bonds rallied and the pound dropped. Benchmark 10-year gilts traded at a yield of 4.104%, down from 4.235% Thursday and an intraday high of 4.634% Wednesday. Sterling traded 1.2% lower at $1.1194, extending earlier losses.

The turmoil in the U.K. is a sharp reminder of the political and economic challenges facing leaders across the West as they grapple with fast-rising inflation and weak growth. Price increases are forcing central banks to quickly raise interest rates, denting economic growth and making financial markets far more sensitive to deficits and debt.

The focus in the U.K. will now turn to whether Ms. Truss, who won a Conservative Party leadership contest in September to replace Mr. Johnson on a pledge to cut taxes, will herself survive without her longtime political ally and with her project to revitalize the economy in tatters.

Ms. Truss has the lowest level of satisfaction with the public ever recorded for a British prime minister, according to polling firm

Ipsos,

with just 16% of people saying they were satisfied. When

King Charles III

met with Ms. Truss on Wednesday, he started the meeting with the words, “Dear, oh dear.”

“We’ve never seen a prime minister that has been this unpopular this quickly,” said Matthew Goodwin, a politics professor at the University of Kent. “It’s when not if she gets pushed out,” he said. “I have never seen anything like this in my lifetime.”  

Since the plan to cut taxes to bolster economic growth was announced three weeks ago—alongside major new subsidies to cap prices of energy—the pound has sagged to a record low against the dollar, the Bank of England has had to launch an emergency program to buy government bonds to prevent the market selloff from morphing into a financial crisis, and the Conservative Party has tanked to record lows in opinion polls. The plan earned a rare rebuke from the International Monetary Fund and ratings agencies such as Moody’s.  

Despite the U-turn on the tax plans, Britons still face a difficult winter, with strikes, rising inflation, more interest-rate increases and a recession in the cards.

“The risk now is that investors have forgotten that there are significantly more problems than just an ill-advised and ill-timed fiscal easing to deal with,” said

James Athey,

investment director at asset manager

Abrdn.

Some Tory lawmakers are now plotting to replace Ms. Truss with a unity candidate such as former Treasury chief

Rishi Sunak,

hoping a new face might steady the ship ahead of local elections next May, according to several lawmakers.

Ms. Truss had been trying to tough it out. This week she repeatedly told lawmakers both publicly and privately that she was going to see the plan through, according to officials. But by Thursday, government officials were drawing up alternatives, they said.

Conservative lawmakers, meanwhile, balked at the public-spending reductions needed to fund the tax cuts, especially given high inflation that has raised the cost of living for ordinary Britons. Lawmakers were also worried that the stimulus package might force the central bank to raise interest rates even higher, hurting homeowners who pay variable interest rates on their borrowing for homes.

In recent days, Mr. Kwarteng tried to calm the storm. On Monday, the chancellor brought forward by several weeks the date of his plan to balance the government’s finances to Oct. 31  and appointed an experienced civil servant to beef up the Treasury’s team.

To appease rebel lawmakers, Mr. Kwarteng earlier this month announced the shelving of a plan to cut the top 45% rate of tax, a move that is estimated to save the government £2 billion a year. Some £60 billion in government cuts were needed to fund the package, according to the Institute for Fiscal Studies, a think tank. The corporate tax raise, worth some £18.8 billion a year to the exchequer, goes some way to plugging that hole.  

Even as Mr. Kwarteng attended a IMF meeting of finance ministers in Washington on Thursday, the head of the fund urged the U.K. government to reverse its tax plans and work alongside the central bank to control inflation. Mr. Kwarteng told reporters he “wasn’t going anywhere.” But late Thursday, he boarded the last flight to London, departing the conference early. He was fired from his job shortly after his arrival in London.

Mr. Kwarteng’s hasty departure from Washington also drew parallels with another dark economic moment for the U.K.: the 1976 sterling crisis, when then Chancellor Denis Healey had to turn back from the airport to address growing financial chaos at home. He was on his way to an IMF meeting.

For months, Mr. Kwarteng and Ms. Truss have said the only way to stop a cycle of low growth and ever-higher taxes to pay for public services is to cut taxes to juice investment and grow the economy faster. However, few in Parliament believe they have had the political mandate to push through the controversial plans, such as overhauling housing regulations.

Markets already priced in much of the U-turn on Thursday. But the political damage may prove harder to reverse, analysts say. A YouGov poll put the opposition Labour Party with 51% of votes, compared with 23% for the Conservative Party.

The fresh reversal of parts of the package of tax cuts comes as the Bank of England ends a program of government-bond purchases intended to prevent a selloff that would have threatened the stability of the country’s financial system. 

The BOE’s program had a slow start, but the central bank bought £4.7 billion of government bonds Thursday, the largest amount since it launched the emergency intervention on Sept. 28. The BOE intends to launch a delayed program of bond sales known as quantitative tightening on Oct. 31.

—Joe Wallace contributed to this article.

Write to Max Colchester at Max.Colchester@wsj.com

Mr. Kwarteng, who just three weeks ago presented the U.K.’s largest tax cuts since the 1970s, was asked to quit by Ms. Truss as markets balked at the scale of the borrowing required to fund the package and her lawmakers protested at the prospect of deep public-spending cuts. Mr. Kwarteng became the second-shortest-serving chancellor of the exchequer in recent British history. He was replaced by

Jeremy Hunt,

a party centrist and former foreign secretary.

In a scramble to shore up support within her party, the embattled Ms. Truss also ditched her plan to prevent a planned rise in the rate of corporate income tax next April to 25% from 19%—a move taken by predecessor

Boris Johnson’s

government to help shore up finances. The U-turn was the second major part of her tax-cutting package to be abandoned recently.

“It is clear parts of our mini-budget went further and faster than markets were expecting,” she said in a nationally televised address. “We have to deliver the mission in a different way.”

U.K. government bonds rallied and the pound dropped. Benchmark 10-year gilts traded at a yield of 4.104%, down from 4.235% Thursday and an intraday high of 4.634% Wednesday. Sterling traded 1.2% lower at $1.1194, extending earlier losses.

The turmoil in the U.K. is a sharp reminder of the political and economic challenges facing leaders across the West as they grapple with fast-rising inflation and weak growth. Price increases are forcing central banks to quickly raise interest rates, denting economic growth and making financial markets far more sensitive to deficits and debt.

The focus in the U.K. will now turn to whether Ms. Truss, who won a Conservative Party leadership contest in September to replace Mr. Johnson on a pledge to cut taxes, will herself survive without her longtime political ally and with her project to revitalize the economy in tatters.

Ms. Truss has the lowest level of satisfaction with the public ever recorded for a British prime minister, according to polling firm

Ipsos,

with just 16% of people saying they were satisfied. When

King Charles III

met with Ms. Truss on Wednesday, he started the meeting with the words, “Dear, oh dear.”

“We’ve never seen a prime minister that has been this unpopular this quickly,” said Matthew Goodwin, a politics professor at the University of Kent. “It’s when not if she gets pushed out,” he said. “I have never seen anything like this in my lifetime.”  

Since the plan to cut taxes to bolster economic growth was announced three weeks ago—alongside major new subsidies to cap prices of energy—the pound has sagged to a record low against the dollar, the Bank of England has had to launch an emergency program to buy government bonds to prevent the market selloff from morphing into a financial crisis, and the Conservative Party has tanked to record lows in opinion polls. The plan earned a rare rebuke from the International Monetary Fund and ratings agencies such as Moody’s.  

Despite the U-turn on the tax plans, Britons still face a difficult winter, with strikes, rising inflation, more interest-rate increases and a recession in the cards.

“The risk now is that investors have forgotten that there are significantly more problems than just an ill-advised and ill-timed fiscal easing to deal with,” said

James Athey,

investment director at asset manager

Abrdn.

Some Tory lawmakers are now plotting to replace Ms. Truss with a unity candidate such as former Treasury chief

Rishi Sunak,

hoping a new face might steady the ship ahead of local elections next May, according to several lawmakers.

Ms. Truss had been trying to tough it out. This week she repeatedly told lawmakers both publicly and privately that she was going to see the plan through, according to officials. But by Thursday, government officials were drawing up alternatives, they said.

Conservative lawmakers, meanwhile, balked at the public-spending reductions needed to fund the tax cuts, especially given high inflation that has raised the cost of living for ordinary Britons. Lawmakers were also worried that the stimulus package might force the central bank to raise interest rates even higher, hurting homeowners who pay variable interest rates on their borrowing for homes.

In recent days, Mr. Kwarteng tried to calm the storm. On Monday, the chancellor brought forward by several weeks the date of his plan to balance the government’s finances to Oct. 31  and appointed an experienced civil servant to beef up the Treasury’s team.

To appease rebel lawmakers, Mr. Kwarteng earlier this month announced the shelving of a plan to cut the top 45% rate of tax, a move that is estimated to save the government £2 billion a year. Some £60 billion in government cuts were needed to fund the package, according to the Institute for Fiscal Studies, a think tank. The corporate tax raise, worth some £18.8 billion a year to the exchequer, goes some way to plugging that hole.  

Even as Mr. Kwarteng attended a IMF meeting of finance ministers in Washington on Thursday, the head of the fund urged the U.K. government to reverse its tax plans and work alongside the central bank to control inflation. Mr. Kwarteng told reporters he “wasn’t going anywhere.” But late Thursday, he boarded the last flight to London, departing the conference early. He was fired from his job shortly after his arrival in London.

Mr. Kwarteng’s hasty departure from Washington also drew parallels with another dark economic moment for the U.K.: the 1976 sterling crisis, when then Chancellor Denis Healey had to turn back from the airport to address growing financial chaos at home. He was on his way to an IMF meeting.

For months, Mr. Kwarteng and Ms. Truss have said the only way to stop a cycle of low growth and ever-higher taxes to pay for public services is to cut taxes to juice investment and grow the economy faster. However, few in Parliament believe they have had the political mandate to push through the controversial plans, such as overhauling housing regulations.

Markets already priced in much of the U-turn on Thursday. But the political damage may prove harder to reverse, analysts say. A YouGov poll put the opposition Labour Party with 51% of votes, compared with 23% for the Conservative Party.

The fresh reversal of parts of the package of tax cuts comes as the Bank of England ends a program of government-bond purchases intended to prevent a selloff that would have threatened the stability of the country’s financial system. 

The BOE’s program had a slow start, but the central bank bought £4.7 billion of government bonds Thursday, the largest amount since it launched the emergency intervention on Sept. 28. The BOE intends to launch a delayed program of bond sales known as quantitative tightening on Oct. 31.

—Joe Wallace contributed to this article.

Write to Max Colchester at Max.Colchester@wsj.com