George Osborne has sought to reassure rebellious Conservative MPs that David Cameron would only accept a deal on the European Union budget if it was "good for the British taxpayer".
After the Prime Minister went down to a humiliating Commons defeat when 53 Tory MPs joined forces with Labour to demand a real-terms cut in EU spending, the Chancellor said the rebels' frustrations were "understandable".
He instead directed his anger at Labour for being "opportunistic" in Wednesday night's vote and said leader Ed Miliband and shadow Chancellor Ed Balls had taken "a step further away from government".
Mr Cameron is calling for a real-terms freeze in EU spending for the next seven-year budget from 2014 to 2020, but the Commons voted by 307 to 294 for the budget to be cut.
Liberal Democrat Deputy Prime Minister Nick Clegg warned that it was unrealistic to demand a reduction in spending that would not be supported by any other member of the EU.
Mr Osborne declined to say whether he believed a real-terms cut was possible, but said: "We are going into these negotiations with a tougher position than any British government before us.
"We will veto any deal that is not good for the British taxpayer. We will only put to the House of Commons a deal that is good for the British taxpayer.
"That is our position. It is the beginning of a negotiation, let's see where that negotiation leads. But no one should doubt David Cameron's determination, my determination, to deliver a deal that is good for the taxpayer and puts an end to outrageous increases in European spending."
Mr Clegg earlier said he would like to see a cut in British funding for the EU but insisted it was an impossible demand. He pointed out that scuppering a seven-year deal in the quest for a cut rather than a freeze in spending could result in more expensive annual budget-setting over which the UK would not have a veto.
In a question and answer session after a speech at Chatham House, he said: "I'm the Deputy Prime Minister of a Government that's unfortunately had to cut 20% of the policing budget. Of course I would like to see less money go to the European Union budget. It's what you think is the best possible deal rather than insist on an impossible deal."