It tells it what type of document it is, in this case, html. so the browser will parse it as html, and use the charset listed, the charset is what chars the document can use. (so you might need a different one to make your page in chineese or russian since they use different letters, but I dunno much about charsets so iso-8859-1 might have those letters in it)
If it said text/plain instead of text/html for example, it wouldn't parse the html, and the browser would just display the file so you'd see things like the <html> tags