This is compromising because the PM negotiates a middle-ground solution: the end users reduce/simplify what they originally wanted, and the project can implement a version of the change without increasing the constrained budget. Compromising is characterized by each side giving up something to reach an agreement that is acceptable and achievable within constraints (scope/cost/time). This matches Project+ objectives that include applying appropriate communication and people-management techniques (including handling disagreements and stakeholder expectations) to keep delivery feasible.
It is not collaborating, which aims for a true win-win by addressing root needs and often requires more time or resources (for example, securing more budget, changing constraints, or redesigning to meet all requirements).
It is not smoothing (downplaying differences and emphasizing agreement) because the PM is actively changing the request content to fit constraints. It is not avoiding, because the PM is directly engaging and resolving the conflict rather than postponing or sidestepping it.
So the PM used compromising to maintain stakeholder buy-in while protecting the budget constraint and still achieving an implementable change outcome.