Zakat as a counter-cyclical welfare instrument: macroeconomic evidence from Indonesia

Purpose This study aims to examine the role of zakat as an Islamic fiscal instrument in sustaining household consumption during inflationary periods and explores its complementarity with government social spending in Indonesia. Design/methodology/approach The study uses provincial-level panel data from 34 Indonesian provinces covering 2020–2024. Fixed effects regression models are used with comprehensive macroeconomic controls, including income, unemployment, investment and inflation. Interaction terms are incorporated to capture heterogeneity across income groups and assess the stabilizing role of zakat under inflationary pressures. Findings The results indicate that zakat significantly and consistently increases household consumption, demonstrating strong redistributive effectiveness in enhancing purchasing power. While inflation adversely impacts consumption, zakat mitigates these negative effects, particularly for low-income households, suggesting its counter-cyclical stabilizing role. Moreover, zakat and government social spending exhibit mutually reinforcing welfare effects, indicating that coordinated policy interventions strengthen resilience against economic shocks. Practical implications The findings underscore the importance of strengthening zakat governance and integrating Islamic social finance with public welfare systems to enhance consumption smoothing, reduce poverty and support macroeconomic stability during inflationary episodes. Originality/value This study provides novel empirical evidence on the macroeconomic role of zakat as a fiscal stabilizer, highlighting its complementary relationship with state social spending and its potential contribution to welfare enhancement and economic resilience in an inflationary context.