Objectives of Fiscal Policy in an Islamic Economy

Fiscal policy in an Islamic economy would be used to achieve the same objectives as in non-lslamic economies (i.e. the objectives of economic stability, growth and an acceptable distribution) plus other objectives which are embodied in the Islamic doctrines or must be achieved in order to apply the Islamic laws. At least three of these objectives can be distinguished.

1. Islam establishes a higher degree of economic equality and democracy through, among other principles and laws, the basic principle that “wealth should not be permitted to circulate amongst the wealthy only”. This is clearly stated in the Holy Quran. This makes it imperative that the economic system should be such as to provide, for all able members of society, a fair measure of equality of opportunity for securing a decent livelihood, thereby sharing honourably in the national wealth through honest labour and sincere achievement. The disabled secure their basic needs honourably, though the religious tax of Zakah and other dues imposed on well- to-do members of the society. The economic implications of the tax of Zakah will be discussed in the next section.
2. Since Islam prohibits the payment of interest on any type of loan, it follows that an Islamic economy would not be able to manipulate the rate of interest in order to achieve equilibrium in the money market (i.e. between the supply of and demand for money). Hence the Islamic authorities must find an alternative tool to achieve this equilibrium. This alternative tool is the rate of dues on idle cash. These dues are kinds of taxes which would naturally fall within the scope of fiscal policy. Economic dues are the basic tools of discretionary fiscal policy in Islamic economies. It follows that Islamic economies would use fiscal policy in achieving equilibrium in the money market. The mechanism of this will be explained in detail in the next section.
3. An Islamic economy would be committed to assist other less- developed Islamic economies and to spread the message and teachings of Islam as widely as possible. Thus, part of government expenditure will be devoted to activities which promote Islam and increase the welfare of Muslim brothers in other, less-developed Islamic economies. The taxpayer in Islamic economies realizes that part of the taxes he pays are committed to the service of Islam.

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