ACKNOWLEDGEMENT

We Would like to pay our praises and Humblest thanks to Allah Almighty the most merciful and beneficiate of all, who bestowed us with the ability to complete this project.

It gives us immense pleasure and honor to extend our thanks to our kind & Cooperative teacher Mr. Hafiz Azmat for his valuable advices and suggestion through out our semester, in order to perform well & Up to mark.

Finally, We pay regards of gratitude to our parents, as they and their prayers for our success are always been a pillar of strength for us in our life.

Fiscal Policy in an Islamic State

The study incorporates fiscal policy in Islamic Economy into a simple macroeconomics model of an Islamic Economy and analyzes the role of Fiscal Policy in national income determination.Zakat could be used as a counter-cyclical policy through discretionary and non-discretionary fiscal policy. During the expansion phase of the business cycle, the government reduces Zakat expenditures to close the inflationary gap. This action helps increase the Zakat surplus in the BAIT-UL-MALL likewise Zakat expenditure could be increase by using the Zakat surplus accumulated during the boom periods, when the economy is in the downswing to spur aggregate spending and economic activities.Therefore, Zakat could complement taxation and government spending as tools of stabilization policy.

Introduction of Fiscal Policy Before the World Economic Depression of 1930’s it was

believed that the economy was in the state of full employment and that inflation was impossible phenomenon. Hence there was no justification for state intervention in the economy but after the great depression of 1930’s the Keynes gave a revolution theory of intervention of a state in the economy. After the Keynes theory the most of the countries solved the problem of un-employment and inflation with Keynes Fiscal policy.

Fiscal PolicyAccording to P.A Samuelsson all

methods activities and measures to obtain and spend revenue are called “Fiscal Policy”. The Chief purpose of

this Fiscal policy is to maintain a standard of Full Employment with out

inflation or scarcity of money.

Instrument of Fiscal Policy

Government Expenditure

Direct & Indirect Taxes

Deficit Financing

Transfer Payments

Objectives of Fiscal Policy

To keep the prices stable To maintain consumption at

a standard level To decrease the gap of

incomes To take steps for economic

progress To achieve the level of full

employment To eliminate the loss in

balance of payments

Islamic State & Fiscal Policy

Objectives of Islamic State Safeguard of religion,

defense of the Islamic State and its citizens

Struggle for the dominance of Allah’s decree

Establishment of state administrative machinery, maintain law & Order

To administrate property in the collectively interest of the society

Objectives of Fiscal Policy in Islamic State

Eradication of full Employment

Equitable distribution of wealth

Economic Stability

Faster Economic progress

Zakat as an Instrument of Fiscal policy

The most important element of the Islamic fiscal policy is Zakat. In this perspective Zakat can not be regarded as tax, for its economic effects are different from taxes. The Zakat has been made obligatory by Allah Almighty. Our Holy Quran contains several verses which declare Zakat obligatory upon the Muslims.

Equitable Distribution of Wealth

In Zakat Islam has built a strong redistributive mechanism. Islam disapproves concentration of wealth. It prescribes several for the promotion of circulation of wealth and elimination of concentration of wealth. So that the wealth and income may be equitable distribute among the members of the society.

Achieving full Employment Level without Inflation

Stability in the value of money is essential for the success of the economic system of Islam. Among this Islamic State aims at achieving full employment to every Muslim citizen. The interest is unlawful in Islamic economic system. The Monetary Policy would not be conducive to the achievement of the goal of full Employment without inflation.

Zakat & Economic Stability

The Muslim countries have to face stagflation which is the result of inflationary pressure. Moreover the inflation will more effect on negatively on investment and saving. Zakat will also play an important part as a stabilizing a discretionary Fiscal stabilizer in the economy.

Distribution of Zakat

Zakat can be distributed among 8 categories of people. For Example

The poor, one who has neither material assets nor means of livelihood

The needy, one with insufficient means of livelihood to meet basic needs

Other recipients include the one who has converted to Islam

One who is trapped in a journey, etc

Effect of Zakat on Consumption

Consumption Y C+Z

C

B

A

0 Effects of Zakat on Consumption X

Impact of Zakat on InvestmentExpected Rate of return Y

r2

r1

0 ¡0 ¡1 ¡2 X

Volume of new investment in Islamic Economy

E/(E-1)

Impact of Zakat on Economic Development Y Y= C + S(I) + Z

C.I.Z C’+ I(s) +(G)

C’+ I

C”

C

0 Y0 Y1 Y2 Y3 Real NNP X

Conclusion

In an Islamic State there are many tools by which can be used to control Inflation and Un-employment. We have come to know that there are more and effective instruments of Fiscal Policy in an Islamic Economy or state than a Capitalistic Economy. So an Islamic State can control the Inflation and Un-employment in a better and effective way by using its Islamic Fiscal policy.

Thank You So Much for your Cooperation