By Jason Douglas and Isabel Coles

LONDON--U.K. Treasury chief Rishi Sunak set new tax and spending plans as forecasts showed the economy is set to grow rapidly in 2021 despite rising inflation and concerns over Covid-19.

Mr. Sunak said the U.K. economy is forecast by the Office for Budget Responsibility, the U.K.'s fiscal watchdog, to grow 6.5% in 2021 and 6% next year.

The budget deficit is forecast to narrow from 7.9% of annual gross domestic product in the fiscal year through March to 3.3% the following fiscal year. By the 12 months through March 2025, the deficit is forecast to have shrunk to just 1.7% of GDP.

Mr. Sunak's budget included an array of new spending pledges in areas including health and education, financed by higher tax revenues from faster growth. He set higher tax rates for companies in March.

Mr. Sunak's budget comes as the Bank of England weighs an interest-rate rise at a critical policy meeting next week. A move in the coming months would put the BOE out in front of the U.S. Federal Reserve and other major central banks in tightening policy to tame surging inflation.

Write to Jason Douglas at Jason.Douglas@wsj.com and Isabel Coles at isabel.coles@wsj.com

(END) Dow Jones Newswires

October 27, 2021 08:30 ET (12:30 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.