Speaking at a joint local authority association seminar on capping in London on Tuesday, Dr Smith said releasing the shackles on a limited number of councils would provide the government with vital information on the likely impact of freeing all authorities from restrictions.
'This information would be important in giving the government confidence to relax the regime generally,' Dr Smith said.
'The idea is to relax constraints for a relatively small number of councils, see what happens and go further if the forecast disaster does not occur,' he said.
Dr Smith said the 'advanced party option' was preferable to a sudden abolition of capping or allowing certain authorities awarded a 'trust' status greater financial freedom.
According to Dr Smith, the consequence of a 'bonfire of controls' would be an 'enormous expansion of local authority spending'.
'The problem with big bang is it encourages local authorities to do things which is collectively not in their interests,' he said.
Dr Smith said treasurers would take a short term view and assume the relaxation in rules would not last and would raise spending as much as possible to gain the maximum advantage for their councils.
A policy of allowing greater financial freedom for councils that meet certain criteria would also be unacceptable, Dr Smith said, because it would effectively increase central government control.
He said councils would be faced with conforming to government-selected criteria if they wanted capping removed.
This approach would also fail to give an accurate picture of what would happen if capping was completely abolished since freedom to spend would be given to councils who were least likely to abuse the restored power.