Dr. Syed Ammad Ali

Assistant Professor, AERC, Karachi University

To run a country’s economy, any government essentially relies on two fundamental economic policies: Monetary Policy and Fiscal (or Budgetary) Policy. The main objectives of these policies include controlling inflation and unemployment, boosting economic growth, and maintaining balance in external payments. In the current era, however, the role of monetary policy has been largely restricted to controlling inflation. As a result, fiscal policy has gained increased importance, becoming the primary tool for addressing poverty, and growth.

In light of this, the following lines aim to explore what the budgetary structure of an Islamic state should look like. A budget policy essentially outlines the expected revenues and expenditures of a government. When discussing sources of government income, taxes are a major component. In addition, governments often generate income through the sale of natural resources.

However, an Islamic government has access to additional revenue sources, such as Zakat, Ushr, and Khums. A unique feature of these sources is that they are voluntary in nature and do not harm the welfare/utility loss of the payer.

Regarding the use and sale of natural resources, it is important to remember that, from an Islamic viewpoint, land belongs to Allah, and humans are His vicegerents. As such, they are responsible for enforcing His commandments on earth. All Muslims are part of a single Ummah and collectively share rights to the resources of the earth—these rights are not limited to the current generation but extend to future generations as well. In this context, Caliph Umar (RA)’s decision not to distribute conquered lands among the warriors (Mujahideen) as Ganimat is often cited as a significant precedent.

One key principle in modern economic policy is sustainability. From this perspective, Islamic principles support long-term sustainability and restrict the overexploitation of resources.

Regarding taxation, Islam has laid out clear guidelines: not only is excessive taxation sinful, but even when collecting taxes even from non-Muslims, there should be no element of hardship. For example, Urwah ibn Zubayr narrated that Hisham ibn Hakeem (RA) once saw a tax collector in Homs mistreating some Christian Copts by making them stand under the sun while collecting Jizya. He objected, citing the Prophet Muhammad (PBUH) who said: “Allah will punish those who torment people in this world” (Sunan Abi Dawood 3045).

Similarly, in Sahih Bukhari (Hadith 3700), Caliph Umar (RA) is reported to have strictly warned against overburdening landowners with taxes. When asked about the tax rate imposed on Iraqi lands, he inquired whether it was within the capacity of the land to produce. Upon being assured that the taxes were fair, he emphasized not to exceed the land’s potential.

Such teachings clearly prohibit oppressive taxation and promote ease and fairness in tax collection.

After sources of income, the second component of fiscal policy is government expenditures. Major spending areas include interest payments on debt, defense, and salaries of public servants, along with spending on education, health, and social protection. These expenditures are typically divided into:

• Developmental Expenditures (e.g., infrastructure, public projects)
• Non-Developmental (Current) Expenditures (e.g., salaries, administration)

Islam does not prohibit government spending on these areas except for interest payments, which are strictly forbidden. Across all expenditures, Islam instructs that moderation should be maintained and extravagance (israf) avoided. Israf refers to unnecessary spending beyond one’s needs, such as spending millions on clothing that can be acquired for much less.

Likewise, tabzeer (wastefulness)—spending on completely unnecessary things—is condemned. The Qur’an equates those who engage in tabzeer to the “brothers of Satan.”

In this light, luxurious perks for government officials—such as expensive cars with fuel allowances, inflated salaries, and lavish privileges—are considered israf. Even ministers, who claim to serve the public, sometimes become burdens on the nation. A worthy example is Caliph Abu Bakr (RA), who fixed his salary equivalent to that of an ordinary labourer, reasoning that if a common citizen can survive on such an income, so can a leader.

In today’s budgeting process, all government departments submit their projected expenditures (often extravagant) for the next fiscal year. The government then determines how to fund them—mainly through taxation. In practice, this leads to new taxes or increases in existing ones every year, burdening the general public.

Islam teaches: “Stretch your feet according to your blanket” and regards the giving hand superior to the receiving one. Based on this principle, a government should first assess how much income it can generate without imposing unjust taxes, and then prioritize expenditures, funding only the most necessary ones.

If, despite these measures, expenses exceed revenues, the government may resort to borrowing—although it’s not ideal, it is permissible under Islamic principles, provided the loans are interest-free.

With the development of Islamic banking, interest-free loans have become feasible for governments. The burden of the loan can be reduced if developmental expenditures are funded through partnership-based financing, such as Public-Private Partnerships (PPP) or Islamic Sukuk (Sharia-compliant bonds). This ensures that projects are profitable and efficient, as the private sector will only invest in financially sound ventures. Profits can either be used to buy out private ownership or reinvested in other sectors.

However, if borrowed funds are used for non-developmental expenditures, it will inevitably lead to future tax burdens, which should be avoided for both economic and moral development; as Islam teaches prudence and financial discipline.