Former finance minister Ruth Richardson has warned that Western governments are bankrupt and "quantitative easing policies" of their central banks will only make matters worse.

Quantitative easing is what non-economists call "printing money" when, in extreme circumstances, governments flood their financial system with money, easing pressure on banks by giving them extra capital.

But Miss Richardson – whose anti-welfare message and austerity cuts in her 1993 "mother of all budgets" was labelled "Ruthanasia" – told CNBC that governments should stop wasting money and concentrate on structural reforms.

"The British government is bankrupt," she said. "I ask, where's the capital going to come from? All the Western economy governments are in a bankrupt state."

During the interview, Miss Richardson was challenged on this view by the chief investment officer of an international investment management company, London and Capital's Ashok Shah.

"The risk is precisely the opposite, I think the role of the government is going to expand in the near future as it will be the one to provide capital to banks," said Mr Shah.

Nobel Prize-winning economist Joseph Stiglitz said European governments got it wrong because their austerity measures will only extend the global economic downturn.

Though the exchange rate for the NZ dollar -- which had in previous years been as high as US82c -- fell to US51c as recession hit in the wake of Miss Richardson's austerity budget, during the interview she dismissed the view that cutting government spending will hit growth.

"I don't think this is just a cyclical problem, this is a structural problem and you don't fix it by throwing more money at it," she said. "The government doesn't need to spend at the level it does, it needs to look at the quality of that spending."

Central banks printing money will only make the crisis worse, Miss Richardson warned.

"The very last the financial system wants is more of the same. That only compounds the error," she said. "The government must put its own house in order, that means that if you take welfare for example, instead of giving everybody who doesn't need it a cheque, you target it, you reserve it for those who truly need it most."

Governments needed to put confidence in the private sector, the former finance minister said.

Central banks' liquidity response had been "played out to excess."

Governments which poured money into banks and became shareholders now needed to get out, because "governments are not good owners of those assets, they do not know about risk management," she said.

"It's a moral hazard. The more a government is in there, the less the bank, the management, the board feel they're responsible for decision-making."