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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.
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