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 Policy
According 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  Objectives of Fiscal Policy

 Government Expenditure  To keep the prices stable

 To maintain consumption at
 Direct & Indirect Taxes a standard level
 To decrease the gap of
 Deficit Financing incomes
 To take steps for economic
progress
 Transfer Payments
 To achieve the level of full
employment
 To eliminate the loss in
balance of payments
 Islamic State & Fiscal Policy
 Objectives of Islamic State  Objectives of Fiscal Policy
 Safeguard of religion, in Islamic State
defense of the Islamic State  Eradication of full
and its citizens Employment
 Struggle for the dominance
of Allah’s decree
 Equitable distribution of
 Establishment of state wealth
administrative machinery,
maintain law & Order
 Economic Stability
 To administrate property in
the collectively interest of
the society  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

0 Effects of Zakat on Consumption X

 Impact of Zakat on Investment
Expected 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”

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