In a speech outlining health and education projects which the Government plans to support with pounds 1bn from the National Lottery, Mr Smith criticised past use of the funds.
He told the Labour MP Dennis Skinner, who complained that his and other left-wingers' constituencies had missed out in the past, that around 15,000 people had been to see the Churchill Papers.
The purchase of the papers by the Heritage Lottery Fund caused controversy in 1995. One of the main beneficiaries was the then Conservative MP, Winston Churchill, and it later emerged that the Churchill family had already made pounds 6m from publishing deals involving the papers.
Mr Smith said that, in future, lottery funding would be directed away from spending on bricks, buildings and other objects and towards spending on people and activities.
Yesterday, he wrote to the Arts and Sports Councils, the National Lottery Charities Board and the Heritage Lottery Fund to set out his aims in reforming the lottery.
In future, it would be easier for less wealthy organisations to benefit and the distributing bodies would be asked to look at how they could help to reduce economic and social deprivation, he said.
Under the National Lottery Bill, which received its second reading in the Commons yesterday, a New Opportunities Fund will direct money into projects related to health, education and the environment.
In particular, pounds 400m will be spent on out-of-school activities, pounds 300m on a network of healthy living centres and pounds 300m on training in information technology for teachers and librarians.
There was no reason why everything connected with education or health should be paid by the taxpayer so long as the lottery was funding activities which would not be funded otherwise, Mr Smith said.
"The principle is very clear. Lottery money must not replace Exchequer spending. It must add new value. We stand very firmly by that principle," he said.
John Major, who was instrumental in setting up the lottery, criticised the Government's approach and claimed that Mr Smith's ears had gone pink when he read out the catchphrase "the people's lottery."
Mr Smith had spelt out how he planned to spend an anticipated pounds 10bn of lottery money but had not explained what he would do if the revenue was higher.
"The Treasury won't let him. That can only be because they are keeping open the option of a further smash-and-grab raid on the existing good causes," Mr Major said.Reuse content