President Defends Stockman Speech on Tax Increase : Assails Report Saying Budget Director Believes Hike Is ‘Consistent With Fiscal Sanity’

President Reagan on Friday sharply criticized a report suggesting that Budget Director David A. Stockman believes that a tax increase is fast becoming the only deficit reduction step that is “consistent with fiscal sanity.”

Reagan, traveling in Chicago Heights, Ill., was asked about a New York Times report of an off-the-record speech that Stockman made in Washington June 5 to New York Stock Exchange directors.

‘Deliberate Misquote’

“We have the speech,” Reagan said. “We know what he said. This has been a definite and deliberate misquote.”

White House spokesman Larry Speakes called the article “really bad reporting,” and said that the reporter who wrote it “ought to have his mouth washed out with soap.”

New York Times Washington Editor Bill Kovach insisted that the story accurately portrayed Stockman’s remarks. “I just think it’s unfortunate they didn’t let the President read the story and read the speech,” he said.

Stockman, who earned a scolding from Reagan four years ago when the Atlantic Monthly quoted him as challenging the President’s economic policies, stirred up the latest tempest in a speech delivered shortly before the House and Senate began negotiations to resolve the substantial differences in their versions of the fiscal 1986 budget, both of which aim to cut $56 billion off next year’s deficit.

In the speech, a text of which was obtained by the Los Angeles Times, Stockman did indeed say a tax increase would be “consistent with fiscal sanity.” But the text showed that this remark referred not to Reagan Administration plans but to the House-passed budget, which he said would lead to rapidly escalating deficits unless it was accompanied by a tax increase.

‘True Message’

“That’s the true message behind the House budget--that’s the choice that the American people deserve to have acknowledged,” Stockman said.

Stockman supported the Senate-passed budget, which calls for sharper domestic spending cuts than the House-passed plan. But he found much to criticize in both versions.

“The Senate budget is not riddled with gimmicks and phony savings like the House--but it rests on some pretty optimistic assumptions about the path of the economy over the next three years,” he said.

Leading economists believe the economy will not grow as vigorously as both the Senate and House budgets envision. If the economists are right, Stockman warned, then tax revenues will fall short of targets and deficits will grow even beyond today’s projections.

‘Last Resort’ Tax Hike

In that event, Stockman said, the Administration will call for “even more spending cuts or an acknowledgment that a last-resort tax increase is in order.” Reagan has consistently said he would support a tax increase only as a “last resort” if a bare-bones budget still left the government with a deficit.

Stockman acknowledged that, until the Administration reached a budget agreement with the Republican-controlled Senate last April, “our side had not come clean about the spending consequences of holding the line on taxes.” Those consequences, he said, were:

--That the second stage of the Administration’s military buildup “won’t be possible.”

--That Reagan would not keep his campaign pledge to maintain full cost-of-living increases for Social Security recipients and other federal pensioners.

--That “no taxes mean profound and sweeping surgery is necessary in the rest of the budget--economic programs must be pared to the core.”