I actually agree with your fiance. If YOU insist that an engagement party is warranted to celebrate your engagement, than it would be rude to exclude his family and family friends. The fact that his family is larger than yours and his important/close family friends number higher than your side, is not his fault, it's happenstance.
If you want to curtail the number of his guests, than you have to cut guests from your side as well, i.e. invite immediate family and cut all of the family friends/extended relatives and he should do the same. If you don't want to cut the number of guests, then he should be able to invite the same "category" of guests as you are inviting.
As far as who pays for the engagement party, I would ask him to contribute - but his contribution gives him an equal say in venue, food and how elaborate the party is going to be.
But, why start off your relationship on a sour note - you don't need a party to celebrate your engagement and I think for you to use that as leverage over him (saying you denied me a grand party) will get his back up and make him dig his heels in on his point of view. Each of you needs to give a little and compromise. The relationship is important, not the pomp and circumstance surrounding it.
my parents family friends who they'd invite to weddings etc are people they have known for 30 years and are more than family. even i'd want them there. they came to my wedding in pakistan when my parent's siblings couldn't be bothered.
he's not trying to get you to do something you can't afford. he's just showing you that if he is to invite everyone he has to invite, it will become too big and expensive = waste of money.
if money wasn't an issue for either of you, you wouldn't be thinking along these lines. therefore, save it for something more important!
What these two said. I had this same argument over the weekend with finalizing my sister's weddings guest list where the guy has more guests than he is suppose to and my sister had the same arguments that you are having right now. In the end, you have to realize that a marriage is not just between two people its between two families and you have to live with that family for the rest of your life. You definitely don't wanna start things on a sour note.
Now what I would suggest to you what I suggested to my sister that you don't cancel your engagement and try to work with your fiance and tell him that this is the budget that you are working with and this is all you can afford and this is something that you feel is important and you wish to do. You don't have a solution to the problem right now so why doesn't he help you come up with a viable solution that works for the both of you. Trust me he will apprieciate you more for being honest with him and making a decision with you instead of you deciding something by yourself. HOpe this helps