Euro-MPs have rejected budget belt-tightening and backed inflation-busting rises in EU spending for the next eight years.
British Euro-MPs joined forces to fight the plans but were outnumbered in a Strasbourg vote endorsing European Commission demands for more cash to fund EU policies.
Most MEPs backed a 6.8% rise in EU spending next year and an overall increase of at least 5% in the EU's long-term 2014-2020 budget, both of which are due to be agreed before the end of the year.
Last Friday Prime Minister David Cameron threatened to veto any long-term EU spending plan above an inflation-only rise—effectively a real-terms spending freeze, for both next year and the long-term EU budget.
But the Austrian leader of the Socialist MEPs Hannes Swoboda warned: "If Mr Cameron threatens to use his veto, he should be aware that we can do it as well. The European Parliament is much stronger than Mr Cameron".
British MEPs were outnumbered almost five to one in the vote, with the leader of the Tory contingent, Richard Ashworth insisting: "We believe the EU simply must stop spending money its member states do not have.
"It is plain wrong to impose austerity regimes on Greece and Spain at the same time as trying to increase spending and borrowing across Europe as a whole. That amounts to economic illiteracy.
"Fortunately the last word on this will be at the Council of the EU, (November summit) where Britain has a right of veto. You can be sure there will be some hard bargaining to come."
Glenis Willmott, Leader of the Labour MEPs, said: "In a time of crisis, when public authorities across the EU are cutting vital services, it seems that for Brussels it's still business as usual," she continued.
Liberal Democrat MEP George Lyon said: "It is vital that the EU budget reflects the hard financial times faced by all member states and therefore we want to see a more realistic budget that reflects the realities faced by ordinary people."