March 13 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling used his first budget to ramp up U.K. borrowing and squeeze more money out of businesses, drawing fire from economists critical of his response to the global credit squeeze.

Darling, flanked by Prime Minister Gordon Brown, closed tax loopholes to raise around 1.5 billion pounds ($3 billion) and sold a record amount of bonds to help shore up public finances yesterday. Two-year yields jumped the most in a decade.

Investors and executives, key pillars of the Labour Party's last three election victories, have criticized Darling for failing to prevent the run on Northern Rock Plc and for tax changes they say will damage Britain's standing as a financial center. With government borrowing also increasing, the budget did little to rebuild that relationship.

``Darling is chipping away with these measures at the U.K.'s position as an attractive place for businesses,'' said Paul Davies, head of tax at Ernst & Young LLP in London. ``This is a cost to the U.K., and it will continue.''

Darling defended his budget in interviews with U.K. broadcasters this morning. Brown travels to the European Union summit in Brussels today.

``There is more money going into the economy this year,'' Darling said in an interview with Bloomberg Television today. ``If you look next year there is a tightening. That is the right thing to do. It's a budget for the times. It's looking toward the long term. It's also supporting our economy now.''

Evaporating Support

Brown's lead over the Conservative opposition in opinion polls has evaporated since October after a global jump in credit costs led to the first run on a British bank in more than a century. The government's reputation took a further knock after Darling scrapped a tax break for entrepreneurs, imposed a levy on wealthy foreigners and failed to find a buyer for Northern Rock, forcing it to nationalize the mortgage lender last month.

Labour held a lead of 13 percentage points in September and now is neck-and-neck with Conservatives. Voters' satisfaction with the government's economic policies fell to the lowest in four years in November, according to a survey by Ipsos Mori Ltd.

``The British public is worried about the economy,'' Ben Page, chief executive of Ipsos Mori, a polling company, said in a Bloomberg Television interview. ``Only one person in 20 expects it to improve, so we're pretty pessimistic as a nation.''

Credit Costs

Now, Darling is trying to convince voters he can steer the economy as a surge in credit costs caused by the U.S. subprime mortgage collapse puts Britain on course for its worst year since the end of the last recession in 1992. He also announced help for small companies that will cost 300 million pounds this year.

Darling insisted the U.K. is still attractive for business. He expects growth of around 2 percent this year, which would beat Germany, Italy, France and Japan, according to estimates by the Organization of Economic Cooperation and Development.

He also closed a tax loophole that had benefited oil companies operating in the North Sea, costing the industry as much as $1 billion over the next three years. He snubbed protests by London's financial community and said he plans to start taxing the overseas earnings of foreigners living in Britain from next month.

That marks a shift from the efforts made by Brown, 57, and his predecessor Tony Blair since the early 1990s to end Labour's reputation as the party of high tax and spending. This budget will boost tax as a percentage of national income to 37.4 percent in 2012, the highest in almost quarter of a century.

`No Real Effort'

``There was no real effort to heal the breach'' with the business community, said Bill Jones, lecturer in politics at the University of Manchester and author of the ``Dictionary of British Politics.'' ``Labour has not quite decided which way to turn.''

In addition to tightening tax regulations, the government is also now at risk of breaching its own borrowing commitments. The government will borrow an additional 20 billion pounds in the next four fiscal years and sell 80 billion pounds of gilts.

``There must be a strong chance that spending again overshoots these supposedly `firm' plans,'' said Michael Saunders, chief Western European Economist at Citigroup Inc.

The yield on the two-year note rose as much as 28 basis points, the most since August 1998, taking it to 4.052 percent.

Darling used much of the money raised in the budget to help pensioners and families with young children, diverting 1.7 billion pounds toward them.

While Darling's projections were criticized as too optimistic by some economists, others argued he has been boxed in by decisions taken during Brown's decade at the Treasury. Even though the U.K. has enjoyed its longest period of growth in two centuries, its budget deficit rose to a record last year after Brown increased spending on health and education.

That's leaving Darling with little leeway to follow the example of the U.S. Treasury by introducing a fiscal package to shore up the economy.

``Perhaps the most important thing for a chancellor is to be lucky, and you can argue that Brown had a lot more luck than Darling,'' said Robin Marshall, an economist at Smith & Williamson Investment Management in London, who helps manage about $20 billion in assets.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

Last Updated: March 13, 2008 05:48 EDT