Mac deleting photos I didn't delete.

You are correct that the wording of the setting is incomplete and fails to mention that deletions are also propagated. Nonetheless, iCloud Photos is a full-synchronization facility and does propagate deletions and edits as well as additions.

I'm sorry you lost some photos you did not think you deleted. If it has been less than 30 days since you deleted them, you may be able to recover them from the Recently Deleted album.

How full your iPhone is doesn't matter to this. If you deleted a photo from your phone, the deletion would propagate through iCloud Photos to your other device(s).

If you did not manually delete a specific photo anywhere, it should still exist in full resolution in iCloud and in some resolution in your devices.

The following is from this Apple document:Set up and use iCloud Photos – Apple Support

iCloud Photos automatically keeps every photo and video you take in iCloud, so you can access your library from any device, anytime you want. Any changes you make to your collection on one device change on your other devices too.

Did you archived the photos https://support.apple.com/en-in/HT204055

before downgrading the storage plan https://support.apple.com/en-in/HT207594

if you didn't archived them and downgraded the storage plan then they might have gone see the article also https://support.apple.com/en-in/HT205912

Photos that you add to your device with iTunes won't stay up to date with iCloud. Get help if you have photos from iTunes.

As per the article https://support.apple.com/en-in/guide/photos/pht3bfab2f96/4.0/mac/10.14

When you delete photos and videos from your library, they’re placed in the Recently Deleted album, where they remain for the number of days shown and then are permanently deleted. You can restore items before that period of time. If you have iCloud Photos turned on, you can restore photos and videos from iCloud for 30 days before they’re removed from iCloud and your Mac. If you’re not using iCloud Photos, your deleted photos are removed from your Mac only. You can also manually delete photos from the Recently Deleted album to remove them immediately from your computer and iCloud.

The two devices are synced and signed in with same Apple ID and password on the same network and iCloud photo library is turned as on both https://support.apple.com/en-in/HT204264

And preferences is set up https://support.apple.com/en-in/guide/photos/pht5156cc968/4.0/mac/10.14

So , if you delete photos from any device it will be deleted from the other , even you sign in with Apple ID and password at www.icloud.com see the article https://support.apple.com/en-in/guide/icloud/mm08b49040b5/icloudand delete photos from iCloud.com

It will be deleted from all devices connected ( it could be your iPhone ) see this https://support.apple.com/en-in/HT205856

Are the photos missing from all devices and from iCloud, or only on your Mac?

If you are seeing different items on your Mac and your iPhone, you may want to check, if you are using the same Photos Library as previously on your mac. Quit Photos, if it is running, then hold down the options key ⌥ while launching Photos. Wait for the library chooser dialog to appear, then check the list of Photos Libraries for a different library. Are the missing photos in a different library?