Federal Reserve chairman Arthur F. Burns yesterday urged President Carter to abandon all talk of voluntary advance notification of wage and price increases by business and labor "because it scares people."

In testimony before the Joint Economic Committee of Congress, Burns said that while he personally does not have the slightest doubt about Carter's sincerity in rejecting formal controls, "my confidence is not shared by a large section of the business community."

The Carter administration has proposed an advance warning system of wage and price increases on a voluntary basis. But in the face of combined business and labor opposition, it seems to be backing away from that specific plan, while still pursuing an anti-inflation policy of some kind.

Burns also condemned, in unusually strong language, excessive private bank lending to less developed countries. "Unless we develop some rule of law (to control such lending), we will have chaos, he said.

The Fed chairman revealed that he will shortly make a formal proposal that private bank lending be brought under the surveillance of the International Monetary Fund.

Burn's prepared statement was a bland and rather optimistic evaluation of the economic outlook, focussing on the improved financial outlook, and promising, as before, a moderate monetary policy.

But he was drawn by questions into a discussion of the Carter budget, and the current debate over inflation control.

"I don't wish to criticize anyone," he told Sen. Hubert H. Humphrey (D-Minn.), "but in all honesty, I am bound to say that the increase in the Federal budget is stirring up new fears of inflation which in some degree may turn out to be a self-fulfilling prophecy." Because Treasury borrowing is certain to increase, he said, market interest rates had increased 50 to 75 basis points (1/2 to 3/4 per cent) since December.

As to pre-notification, he argued that "there is a time for everything, but when business is concerned about wage-price controls down the road, it's doubtful that this is the right time to stir up that issue."

In the past, Burns has included pre-notification among the many possible elements of an incomes policy. Asked after the hearing yesterday why he had excluded it, he responded:

"I haven't changed my mind. But I don't want to talk about it. I want to build confidence, and it (prenotification) scares people."

Economic Council chairman Charles L. Schultze, in a breakfast meeting earlier, also appeared to back away from pre-notification, which he said is a "pretty darned formal word" to describe what Carter envisages.

But he said the administration will go ahead with its plans to beef up the existing Council on Wage and Price Stability, and that the CWPS might set an overall inflation target.

Later in the day, President Carter appeared to cast some doubt on an overall target. Asked about criticism os his proposed anti-inflation program by AFL-CIO president George Meany, Carter said he would "retain the option in the future of assessing what we need to do to control inflation."

But he also said that "rigid (wage-price) guidelines are a mistake," and that if were to try to set, say, an overall target that would limit wages or price increases to 6 per cent, that would be too restrictive. Any program he suggests will be voluntary, he stressed, "but I can't force it." 0456 - add 6 Burns - M. tts. Umont.

The discussion of bank lending to less developed countries came in response to questions and comments by Sens. Humphrey and William Proxmire (D-Wisc.). Humphrey cited a Morgan Guaranty Trust Co. report that American banks had loaned $50 billion to LDCS "most on the verge of insolvency." (Humphrey later said that he had exaggerated a bit to make a point.)

Two of the banks, among the five largest in New York, Humphrey said he had been told, were on the Fed's "watch list" as a result.

"I share your concern," Burns said, "and I have communicated my concern to the leading bankers of America . . . in strident tones."

Humphrey said he found Burn's comment "very reassuring", adding that "it's time for the Fed to blow the whistle, and tell some of these countries to borrow from the Arabs - after all, they got the price (of oil) up."

Burns responded: "Amen."