Chancellor George Osborne has admitted rural councils struggle to get a fair share of funding.
And he acknowledged Whitehall funding formulas do little to help tackle the hidden poverty that blights parts of the countryside.
Westcountry MPs have spearheaded a campaign to reform long-standing mechanisms for funding local schools, councils and NHS services.
The Rural Fair Share campaign claims rural councils receive 50% less money per head than their urban counterparts due to the Government’s skewed funding formula.
Nick Harvey, MP for North Devon, said the Chancellor’s comments underlined how “there’s a clear need for reform”.
Appearing before the Treasury Select Committee of MPs, Mr Osborne said he accepted improvements were needed.
“One of the things these formulas have not been very good at tackling is pockets of rural deprivation,” he said.
“For example, in the national funding formula for schools, we are looking at these issues where you can have two schools with the same number of kids on free schools meals – which is not a bad indicator of deprivation – and yet because one is in a rural area and one is in an urban area the rural school gets much less.
“That’s something we’re looking at in the formula for schools – and of course there’s a broader debate to be had. But I think you’re still going to end up in a situation concentrating resources in areas of greatest deprivation.”
The South West is a major loser under the current schools cash formula.
Devon sits sixth from bottom in a national league table of 151 education authorities in terms of funding, with schools getting hundreds of pounds less per pupil than the national average and half as much as in parts of London.
Cornwall and Somerset are only marginally better off than Devon. The announcement on the new schools formula is expected within weeks.
Mr Osborne suggested other areas of public spending could follow, but repeated that the most deprived areas will continue to receive the most support.
“The truth is that our urban areas do get relatively more public spending – but they tend to also have much greater health and deprivation problems,” he said.
“As a constituency MP in Cheshire, I know there’s always a debate about the amount of money per head of population that we receive compared to neighbouring Manchester – and I think there is room for improvement in some of these formulas. But fundamentally, we make a decision as a country that we spend more money in the most deprived areas.”
The MPs want the gap closed when the Department for Communities and Local Government next week unveils the latest local authority spending settlement.
Rural MPs have long complained people living in the country have low pay and pay more council tax, but get less money from Whitehall to fund roads, schools and hospitals.
Liberal Democrat MP Mr Harvey, who has campaigned on fairer funding, said: “The Chancellor’s comments quite clearly acknowledge the unfairness of the current local government funding arrangements in rural areas.
“In expressing the need for changes to the formula, he is joining the lobby of MPs, local authorities, and some 20,000 people from across the country who have said they will no longer put up with this intolerable situation.
“Rural areas like my constituency of North Devon face far higher council tax bills than their urban counterparts.
“Local councils are doing everything they can with decreasing Government funding, but services are being stretched more thinly than ever. With urban councils receiving 50% more per person than in rural areas, there is a huge sense of injustice.
“The Chancellor has said what we’ve all been thinking and if the man in charge of our money thinks it’s unfair then there’s a clear need for reform. The funding settlement is due to be announced next week. On this issue rural areas have spoken – I hope the Government has heard our voice.”