There is a huge body of academic literature examining the role of public services and public finance in the modern economy. Among many other topics, it examines the optimal nature and volume of public services, the arguments for and against decentralization, the appropriate sources and levels of taxation, and the role of contracts between purchasers and providers. In this short book it is not feasible to do justice to a fraction of this wide-ranging and important material, and much must be taken for granted. This chapter therefore summarizes only those parts of the literature directly relevant to the practice of formula funding. In doing so for the most part I assume:

• the national government is charged with the overall stewardship of public services, and has a set of objectives for them. It has taken a policy decision on the desired magnitude and nature of public services;

• the delivery of public services is devolved to a system of local government, or local administration, that is responsible for detailed implementation and enjoys a certain degree of local autonomy. It may deliver services directly, or purchase them from local providers;

• local governments may enjoy some freedom to set their own priorities, local taxes, or user charges, within a framework determined by the national government;

• the national government seeks a funding mechanism for local governments that secures its objectives with respect to public services;

• local governments seek a funding mechanism for local providers that promotes national and local objectives.