4(b) Fiscal Functions and Policy: An Overview

The way the fiscal policy is expected to perform the allocaiton, distribution and stabilization function in an Islamic state has its own distinctiveness arising out of value orientation, ethical and social dimensions in public income and expenditure. The fiscal policy in Islam ceases to be neutral; and is expected to explain the situation not merely as they are but as they ought to be. Thus in an Islamic state the process of allocating resource use between private and social goods, adjustment of the distribution of earning and redistribution of existing income and wealth and the use of budgetary policy as an instrument of price stability,high employment and growth must provide a clear manifestation of social and moral concern in addition to material upliftment. This value loaded Islamic bias based on the principles of benevolence and care for the have-nots should enable the Islamic state to solve the problem of co-ordination or conflict of fiscal functions in a relatively easy way, as in the real world setting, budget planning does not frequently permit evaluation of various objectives on their own merits resulting in multiple conflicts between allocation and distribution, growth and distribution, stabilization and allocation and so on.
This overriding Islamic humane bias in public finance, for that matter in other areas of economics, is derived from Zakah which contains an enormous potential for communal betterment in favour of the poor and disadvantaged members of the community. The Qur’an points out the items on which Zakah revenues can be spent. The Zakah which is to be collected only from the Muslims can be used for the welfare of the non-Muslims as well. But by payment of Zakah Muslims are performing their religious duties also. Thus Zakah levy has a double sanction - spiritual and temporal, not the double nature - religious and secular as wrongly maintained by some western scholars. This is true with regard to most of taxes of early Islamic state.
Inspite of the simplicity of the system, there were a number of taxes prevalent in the early Islamic state. Generally speaking, they are:
(a) Zakah,
(b) Jizia,
(c) Kharaj or land tax,
(d) Spoils of war,
(e) Taxes on mines and treasure trove,
(f) Custom duties and tolls.
It is possible to demonstrate that tax system of early Islamic state was elastic and dynamic in nature. For example, the categories of property to which Zakah is to be applied is not rigidly maintained even by Hadrat Umar himself who introduced a number of changes in the system of Zakah, because it is a means to an end, not an end in itself.

Basis of Budgeting

Again a careful study of the Shari’ah provides us some interesting clues as to what should be the basis of budgeting in Islam (i.e., revenue-vs-expenditure) .
In an Islamic state, the basis of budgeting is not merely the revenue which should determine the expenditure. It is the expenditure which should primarily serve as a basis for mobilisation of revenue. It stems from the Islamic requirement that a state should provide a basic minimum need to all its citizens. Therefore, if the Zakah revenue and contribution of the voluntary sector, recognised by Islam, are not sufficient to meet the basic provisioning for the poor, there is always a scope for additional taxation beyond Zakah provided they are spent in judicious manner. It is therefore implicit that a case of deficit financing can be made in an Islamic economy. This can be arranged through Mudaraba, Musharaka and Murabaha contract. Besides, Islamic government can also raise funds by issuing investment bonds and certificates to the public on the basis of profit-and-loss sharing. From the preceeding discussion, it is clear that an Islamic state should be able to use various fiscal instruments or policies designed to have an Islamic “Social Welfare Function” which describes society’s judgement on the question of weights to be given to the welfare of various individuals and groups (i.e., poor, aged, low-income group, minority).
Let us now have an overview of the monetary policy in an Islamic state on the assumption that fiscal and monetary measures can supplement each other, although they differ in their impact.