£5.2m will be spent raising the road and creating a flood bank.
The Environment Agency says a wall and embankment would protect thousands of homes and businesses.
North Yorkshire Council is to apply to the Environment Agency to lead the programme until 2033.
The Environment Agency says the site is on a floodplain and is not "essential infrastructure".
The scheme, to cost millions of pounds, involves widening the stream through the Cornwall village.
Works to reduce flash flooding in Mousehole lead to a new school playground being installed.
Investments in projects such as coastal defences will aim to protect communities from the impacts of flooding.
Rob Braddick, owner of the Pier House in Westward Ho!, said he wanted to protect his business for future generations.
The claims come as water bills are set to rise by an average increase of £2.70 a month from April.
