How can governments help or hinder the economy? It depends on the context, for example what type of economy it is: agricultural or manufacturing, or else domestic focused or export driven as examples, and it depends on whether the economy is booming or going through a bad patch, and to show how tricky the whole thing is, even when an economy is booming it can be racing too far ahead of itself and might need dampening down a little. But of course, it also depends very much on your political leaning!
Essentially, the government can get involved or can leave well alone. Let’s consider three things:
Taxes
Interest rates
Trade
Taxes, of course, are a source of government revenue which can, in turn, be used to help the economy. Governments can provide health care which helps keep people in work. Or else education which educates the next generation of managers, scientists, technicians, workers, etc. It also helps governments provide such infrastructure as roads, railways, ports and airports that helps the economy move its goods. Whilst there is also an accepted responsibility to look after the sick, the poor and the elderly. But taxes will eat into people’s spending power and companies’ ability to reinvest. So it is a balancing act.
Similar with interest rates. High interest rates encourages people to save which means there is money available to lend. But there is something of a Catch 22 because at the same time it discourages people from borrowing because it costs more. Whereas low interest rates encourages people to borrow and so to spend, but it increases debt. So, another balancing act.
Government policy can also effect trade through import tariffs (also known as duties). These are a kind of tax that is placed on goods produced overseas as they enter the country. It has the effect of making them more expensive and in this way it can protect domestic producers or manufacturers. However, those countries facing your tariffs will almost certainly retaliate and introduce tariffs of their own so affecting your export market. What often happens is that whilst one sector of the economy is helped by a tariff, another sector suffers in the retaliation. Another balancing act.
All governments in all countries are forever rejigging their particular balancing act. In the western world, even a government of the Left knows that capitalism needs to prosper if people are to benefit, even though they may seek to control it more and seek to limit its excesses. Whilst governments of the Right know that they have a social responsibility to help their people in times of need and provide for their health and their education. Government economic policy affects us all: our job opportunities, whether we can afford to buy a home, or how early we can retire, and much else. The balance is never perfect and is forever changing. Watch out for it in history and watch out for it in your own government.