Fiscal Policy & Allocation of Resources

Fiscal policy in a secular state aims at achieving an efficient allocation of resources which yields maximum material benefits to the society. In an Islamic state the concept of efficiency may be interpreted to include harmony between the spiritual and material desires. Resources should be utilized only in a way that achieves welfare of man in world and the Hereafter. Resources should be utilized optimally i.e. without extravagance and catering for the needs of future generations also. Only those goods should be produced, whether by private or public sector, which are permissible by Islamic Shari'ah.

Public sector should produce goods which serve the public interest in general. Such goods are usually indivisible and also generate externalities. Many Muslim jurists have listed the goods which a Muslim state should provide. Ibn Taymiyyah, for example, thought that a Muslim state should cater for national defence, internal security, roads, bridges, canals, water-ways and education. Nowadays we may add to this list the goods that provide military strength which in turn depends on economic development.

Public goods to be provided by contemporary Muslim state include national defence and security (which should be geared to the protection of the nation at large and not to that of certain interest groups within the society), provision of infrastructure such as roads, telecommunications as well as other facilities needed by all sectors of the economy. Social capital should also be developed through provision of education, sports facilities, public health, medical facilities, environmental facilities, piped water supplies, drainages, severage facilities and housing. The public sector should also look after the moral values of the society. The government should see to it that enough resources are provided for achieving this goal. There is no doubt that free operation of the market system, within the rules laid down by Shari'ah, has been emphasized by many Muslim jurists. However, it must be remembered that policy in a Muslim state is not value-free. The government has to regulate the market system in order to ensure the welfare of human beings in this world and the Hereafter. Private and public sectors have to work together for the achievement of that objective. Ibn Khaldun thought that the public sector operations could be the source of success or failure for the market system unnecessary consumption in the private sector and rationalizing government expenditure. The latter will be achieved by rigorous appraisal of government expenditure both before and after the start of a public sector project. Projects that yield maximum benefits to a Muslim society and cause least harm to economic, political and social stability, should be preferred to others. For example, projects which lead to least immigration of labour force should be preferred to those which entail massive immigration and decay of rural life. Having decided projects that serve the goals of a Muslim state, such goods should be provided with the least-cost possible without impairing efficiency.

Source: Fiscal Policy and Resource Allocation in Islam, Ziauddin Ahmed, Munawar Iqbal and M. Fahim Khan. Republished with permission.