They estimate the cost of game production is going to go up from 3.3 -5 toward 6 - 10 million US because of the amount of artwork now needed in games.
Well, that is a bullsh*t argument, mostly from publishers who want to raise the software prices.
If a 30,000 polygon background costs $X, then a 300,000 polygon background doesn't cost $X * 10, because the artists don't put the polygons down one by one. In the end it evens itself mostly out, because time spent on making a good looking low-poly background just gets used to put down the required number of polygons for a high-poly background.
The biggest money-sink I experienced is marketing, where one bit of the campaign can cost as much as a whole team gets paid in salary.
Considering Xenogears is missing 45% of itself.. not surprising that.
I don't know the details of what went wrong in Xenogears. But everyone who played it definitely notices the holes, where they just explain the story in front of a slideshow. So some of the artwork must have been already modelled. My guess is what was missing wasn't artwork, but scripting the game (like "speak with person X to get information Y to progress") and programming bosses.
You could argue if the backgrounds in FF7 were easier or more difficult to make than in Xenogears. On one hand not many people had experience modelling 3D environments or how to organise the required workload. Work could've been wasted on both projects modelling stuff that wasn't useable. The FF7 team didn't have to worry about runtime performance, as it just needed to render once. On the other hand some of the dungeons in Xenogears are very simple, just the edges of the floor lofted up and textured. In the end, we'll never know until we do similar work ourselves.